A Look at Wednesday’s Selloff and Washington’s Effect on Markets (DJIA 21-Month Chart)

Photo: Getty Images

• Dow Jones Industrial Average falls more than 370 points
• ICE U.S. Dollar Index erases post-election gains
• Safer assets rally, with 10-year Treasury yield falling to 2.22%

WSJ — Turbulence in Washington jolted markets out of an extended period of calm Wednesday.

Stocks, the U.S. dollar, and government bond yields slid as investors pulled back from bets on the swift passage of President Donald Trump’s agenda. Wagers that his policies would boost growth and inflation have been unwinding for months, but those moves accelerated Wednesday.

In one of the clearest signs of waning investor confidence, a closely watched measure of the dollar’s value erased its postelection gains.

The Dow Jones Industrial Average lost 372.82 points, or 1.8%, to 20606.93 and the S&P 500 fell 43.64 points, or 1.8%, to 2357.03 in the worst one-day fall for the two indexes since Sept. 9. The Nasdaq Composite lost 158.63 points, or 2.6%, to 6011.24, its biggest decline since June 24.

DJIA 21-Month Chart:

Some traders said Wednesday’s selling was sparked by reports that President Donald Trump had allegedly asked then-FBI Director James Comey to back off the investigation of former national security adviser Michael Flynn, which prompted some congressional Republicans to call for further investigation. In a statement issued Tuesday evening, the White House denied the account.

“The bigger picture here is it puts another dent in the likelihood of getting a congressional majority to pass Trump’s agenda,” said R.J. Grant, director of equity trading at KBW Inc.
How Trump’s Russia Controversy Hurts GOP Agenda
One potential victim of President Trump’s disclosure of sensitive information to Russian officials: Congress’s ambitious legislative agenda. WSJ’s Naftali Bendavid explains how the latest White House uproar could hurt Republicans’ efforts on taxes and health care. Photo: Getty

Trading surged across the NYSE, Nasdaq, NYSE MKT and NYSE Arca, making Wednesday the third-busiest day of the year so far.

U.S. stocks have been close to record highs and few investors said they expect a major pullback, but many said they were increasingly worried about the implementation of proposed policies such as tax cuts, deregulation, and infrastructure spending following a series of developments in Washington.

In March, stocks pulled back as House Republicans stumbled in their efforts to pass a health-care bill, with investors saying it added to doubts that Mr. Trump would be able to push through tax cuts.

Investors piled into assets they perceive as havens, sending gold up 1.8% to $1,257.50 an ounce, its largest one-day gain since March 16. The yield on the benchmark 10-year U.S. Treasury note fell to 2.216% from 2.329% Tuesday—its biggest one-day drop since June 27, when investors dumped stocks following the U.K. vote to exit the European Union. Yields fall as bond prices rise.

Bank stocks—which had one of the strongest runs in the wake of Mr. Trump’s victory in November—were among the hardest hit. The KBW Nasdaq Bank Index of large U.S. commercial lenders notched its worst day since the Brexit selloff, falling 4.1%. It’s now down 3.1% for the year.

Wednesday’s moves come as the U.S. stock market has been quite stable lately.
“That’s people just throwing in the towel on tax reform,” said Michael Antonelli, equity sales trader at Baird.

The move in financials suggests “the market thinks that agenda is dead in the near term. There’s not a huge window for this stuff to happen before the end of the year, then you get into 2018 and the elections,” he said.

The ICE U.S. Dollar Index, which measures the dollar against a basket of six currencies, fell 0.7% to its lowest level since Nov. 4.

The Stoxx Europe 600 shed 1.2% in its biggest one-day fall since late September and Japan’s Nikkei Stock Average posted its biggest daily drop since mid-April.

While political swings may trigger volatility in the short term, longer term they are unlikely to have a major effect on the U.S. stock market, said Kevin O’Nolan, multi-asset portfolio manager at Fidelity International. “U.S. stocks trade off earnings, earnings are linked to growth, and I don’t think it’s going to have a meaningful impact on growth.”

Companies in the S&P 500 are on track for their strongest quarter of earnings growth for several years, according to FactSet.