"Today's the first day where people said, 'Wow, what happens if the Republicans lose Congress?'" said Peter Boockvar, chief market analyst at The Lindsey Group. "I think it's still a far-fetched possibility. There's no question if Hillary wins that Paul Ryan will get all the support he needs from Republicans. As long as they can keep the House, they can block anything Hillary wants to do."
Trump unleashed a wave of Twitter posts Tuesday criticizing Ryan and warning Republicans they could lose the election. Ryan broke ranks with Trump after the release of a video showing him making lewd and aggressive comments about women. Ryan told Republicans in Congress they should feel free to stop supporting the GOP nominee if it would help their chances in the election.
The election has mostly been in the background as the market has been expecting a win by Democrat Hillary Clinton and Republican control of the House and possibly the Senate. The latest drama challenges that view and created an atmosphere of general nervousness, said Art Cashin, director of floor operations at UBS.
"They're afraid this already wacky campaign could turn into the Wild West. Trump tweeted out that he feels unshackled. You're hearing the word 'landslide' and a lot more comments about a 'Pelosi House of Representatives.' They don't want either party to control everything. Gridlock is good for Wall Street," he said, referring to Rep. Nancy Pelosi, former Democratic Speaker of the House.
Even if the Republicans don't lose their hold on Congress, there was some concern a smaller GOP contingent could mean tougher times for Ryan in negotiations on the budget and other matters. Wall Street's big fear is that Democrats would come in with new regulations and less favorable tax plans that the GOP-controlled Congress would have thwarted.
Bank of America Merrill Lynch economist Michael Hanson said even though both candidates propose fiscal stimulus, Trump's plan was seen as more sweeping than Clinton's. A Trump plan was also seen by many as more likely to make it through a Republican Congress.
"The risks the market is not pricing in is the scenario that the Republican party collapses in a civil war," Hanson said. "A landslide seems premature to me."
Goldman Sachs economists, in a note Wednesday, said the chances of a rate hike for this year rose to 75 percent from 65 percent, as GOP candidate Donald Trump slipped in the polls. They said a Trump victory could negatively impact financial conditions, and that could delay the Fed's rate hike plans.
Boockvar said the stock market has also been sensitive to the rise in global long-term rates, as central banks in Europe and Japan pull back from further easing and the Fed moves to hike rates. The U.S. 10-year Tuesday reached a yield of 1.78 percent, its highest level since June 3. As it edged over 1.75 percent Tuesday, Boockvar said the 10-year yield hit a key level it was last at before the U.K.'s vote in late June to leave the European Union.
The question now is whether the 10-year will continue to carve out a new higher range, which he said could pose a risk for stocks. "I really think this rise in rates, because it's happening not because the data has gotten better, has really thrown a wrench into things. If rates were rising because the economy is getting better, I would say that's bearable," he said.
The S&P 500 fell 1.2 percent Tuesday to 2,136, breaking just below its 100-day moving average of 2,138. Health care was off 2.5 percent, a sector seen as being vulnerable to price controls if Democrats take Congress.
The two-year Treasury note, more closely tied to Fed expectations, was also moving higher and it was at 0.86 percent Tuesday.
The Fed minutes, released at 2 p.m. EDT, could therefore be a factor for markets that already see a strong chance of a rate hike in December.
"It's not going to be in neon lights, but my suspicion is the minutes are going to be leaning more in the direction of going in December than not," said Hanson. He said the markets also could be confused by the Fed's messaging as its minutes reflect the desire by some members to raise rates sooner rather than later, but also the fact the Fed overall expects a lower path for future rate hikes based on a view of a slower growing economy.
Diane Swonk, CEO of DS Economics, said she is looking for any message from the Fed on how it will handle communications, which have been confusing. The Fed has said its decision would be based on data, and data dependence was fine when the Fed wanted to stay on hold. But now that it wants to hike, its signaling is not clear, especially as the economic data has become uneven.
"Communications are a wreck. Data dependence was wonderful to convey the Fed wouldn't raise rates for a very long time," she said. But it doesn't work when the market is ready to raise. "This is kind of squishy. It's not clear. It's not effective."
Besides the Fed, there is JOLTs data on job openings and turnover at 10 a.m. EDT Wednesday. Dudley speaks at 8 a.m. EDT, and George speaks at 9:40 a.m.