The stock market on Wednesday took its biggest dive since September, as Wall Street analysts said investors had begun to grapple with the increasing possibility that Washington would be consumed with chaos and fail to enact policies President Trump and his congressional allies have said would boost the economy.
The Dow Jones industrial average fell nearly 373 points, or 1.8 percent, to 20,606.93, as a broad array of other indexes all lost ground. Meanwhile, a widely followed measure of volatility known as the VIX, which had been subdued for months, spiked by a dramatic 21 percent in what was one of the most volatile days in the past decade.
While some had predicted that a surprise Trump victory would bring uncertainty to markets — and foreign markets sold off sharply as election returns came in — the stock market had kept up a steady rise since November. Many analysts cited newfound expectations that a Washington unified by Republican control would deliver an overhaul of the tax system and a large increase in spending on U.S. infrastructure — two of corporate America’s top policy goals.
The White House embraced the notion of a “Trump Rally” and cited the gains as evidence of its immediate effect on the economy. Now, the question is whether the stock market will enter a period of new turbulence if the disarray emanating from the White House generates concern that those policy goals won’t be achieved.
“Right now, we have a Congress that is likely to be consumed with other priorities,” said Brad McMillan, chief investment officer at Commonwealth Financial Network.
One day’s stock market movements, of course, can easily be reversed the next day. But market analysts still noted the convergence of arguably Washington’s most tumultuous week in years and the market swoon.
“The market is kneecapping Trump because of his constant crises, that now look potentially terminal,” said Eric Schiffer, chief executive of the Patriarch Organization, a Los Angeles-based private-equity firm. “The froth came from the belief that tax reform was coming, infrastructure was coming and trade adjustments were coming. With Trump under immense fire, all of those things go into suspended animation.”
Crisis has engulfed Trump’s White House over the past week, starting with the president abruptly firing FBI Director James B. Comey, who received the news by seeing it on a national television broadcast. Trump later said he was thinking of the controversy over allegations that Russia sought to help Trump get elected when he decided to fire Comey.
The following day, Trump hosted the Russian foreign minister and ambassador in the Oval Office. During that meeting, Trump shared highly classified information with the Russian envoy, which U.S. officials said jeopardized a key source of intelligence on the Islamic State.
And by Tuesday, tensions ramped up even further after reports emerged that Trump had asked Comey to drop his investigation into former national security adviser Michael Flynn’s relationship with Russia, according to private notes Comey kept, recounting the exchange.
On Wednesday, stocks dropped and foreign currencies gained against the U.S. dollar. The Standard & Poor’s 500-stock index was off 1.8 percent, the Nasdaq index was down 2.6 percent, and the Russell 2000 gave up 2.8 percent in trading Wednesday. The turbulence comes amid near-record highs following an eight-year bull run fueled by strong earnings, especially in the technology sector. The stock market has been on a tear since the November election.
The Dow, which posted its worst daily performance since September, was weighed down by Apple and Goldman Sachs. Apple was down nearly 3.4 percent and Goldman Sachs was down about 5.3 percent as investors fled the tech and financial sectors for the security of energy, utilities and real estate. The financial sector, in particular, stands to gain from tax cuts and deregulation.
European shares dipped on concerns over Washington. The pan-European STOXX 600 fell 1.2 percent. Germany’s DAX was down 1.4 percent. Britain’s FTSE 100, however, hovered close to its record high. Japan’s Nikkei slipped 0.5 percent.
“The latest controversy involving the Trump administration erodes confidence in his administration’s ability to enact tax reform,” said Michael Farr, who runs a Washington investment firm. “The prospect of significant tax reform has been buoying markets since President Trump was elected. We’ve had many controversies, but nothing has gotten the market’s attention. But once you start to go after tax reform, you are going to have the market’s full attention.”
Some have drawn comparisons between Trump’s troubles and those that brought down President Richard M. Nixon.
Investor unease over Nixon’s future as Watergate storm clouds gathered sent the stock market tumbling in early January 1973. The S&P 500 didn’t fully recover for nearly eight years.
Back then, however, the scandal was relatively advanced. Two top Nixon hands had already been indicted by a federal grand jury. The market topped out two days after the trial began for the seven men accused of breaking into Democratic Party headquarters in the Watergate complex.
“There was tangible proof then that the White House was under serious pressure,” said Kim Wallace, head of Washington policy research at Renaissance Macro Research. “We haven’t seen that tangible proof, yet.”
Jack Welch, a longtime Republican who has praised Trump’s plans for tax cuts and regulatory changes, said on CNBC Wednesday morning that he gives the president an “A” for his agenda.
But the management icon had sharp words for how Trump is running the White House, giving him a “D-minus” when it comes to managing the federal bureaucracy.
“I think without question we’ve got a guy that’s on the right agenda with crappy management practices,” Welch said.
Welch also referred to the Russia story as one of “these little things,” but said he thought any impeachment proceeding would “blow the market away.”
McMillan said the current noise out of Washington alone is unlikely to derail the bull market.
“This is static,” he said. “From a historical perspective, it is just noise. To get a big pullback, typically you need a recession, the Federal Reserve raising rates or you need a spike in oil prices.”
Peterson said that despite the distractions out of Washington and the possibility that there is a loss of investor confidence in Trump, long-term market themes are positive.
“Earnings season has been very strong, both domestically and overseas,” he said. “This changes the calculus of how dependent the market has been on policy, when earnings have been so much better than what were pretty aggressive estimates.”
Tory Newmyer and Jena McGregor contributed to this report.