Markets are entering a new era, where they could be held hostage by Washington's whims.
They could also become more volatile, after the showdown over health care revealed congressional fissures that could affect other Trump policies.
Stocks gave back gains Thursday, after the House of Representatives held off voting on its health-care replacement bill when it could not resolve objections from the fiscally conservative Freedom Caucus. Work continues on the bill, which could come back for a vote Friday.
With health-care reform standing like the lead domino in front of his other policies, President Donald Trump and his administration jumped heavily into the fray this week, meeting with GOP congressional members and tweaking the bill to appeal to a broader group. The market has been anxious about the bill because it is an important hurdle on the way to tax reform.
Stocks have posted double-digit gains since Election Day on the promise that Trump and an all-Republican Congress would provide a pro-growth smorgasbord of policies. Health care is the first big issue, and the House GOP has shown how divided it is, with a caucus of fiscal conservatives challenging the ability of Trump to prove his mastery as negotiator-in-chief.
"This is really a vote on Trump, not so much the health-care vote itself, but the likelihood of tax and regulatory policy getting through," said Jack Ablin, CIO of BMO Private Bank. "I think President Trump has put his political credibility on the line with health care and if nothing gets done, it's really a poor reflection of his ability to influence Congress."
Trump could also come out a winner in the market's view if health care is resolved and the segue to tax reform is quick. Daniel Clifton, head of policy research at Strategas, points out that Trump does not like to lose. "First I would just say the negotiations are most intense at the end of the process. So historically, you'll have a breakdown before things come together," he said. The White House said the delay was a matter of logistics.
Rep. Mark Meadows, who heads the Freedom Caucus, said members are concerned the bill does not lower costs enough for people struggling to pay for health care. He also said his caucus is trying to get to a place where it can agree on the bill. "The president has made some very good faith and goodwill gestures to move the ball along," Meadows said.
Regardless of what happens, the dynamic has now changed and the market, which has been stalled lately, may not continue its easy glide higher, unless there's more proof the pro-growth policies Trump pushed can be made law.
"They have to now sit down and work together. I think we are at the stage where investors are expecting some results, so it's not just about rhetoric and optimism," said Thomas Lee, founder of FundStrat Global Advisors. "They're expected to really deliver something that will actually help produce growth rates and unleash this new era of animal spirits."
Even if the House does vote in favor of replacing Obamacare, the bill is expected to face trouble in the Senate, where passage on the current measure is not expected.
"[The market will] remain hostage until we determine whether the agenda is going to get pushed to a backburner because they can't get it done," said Art Cashin, director of floor operations at UBS. He said the market still thinks the Trump agenda will get done. "We think it's going to be positive. That's why we're willing to hang on to that bet."
Ablin said there is concern that this is just one of a number of fights that will divide the House. "The sense I was getting was Republicans are emboldened by their lock on their base, and they really are not frightened by Trump," said Ablin, who said fiscal conservatives in Congress may not approve of the hefty spending Trump would like to do on stimulus and other programs.
He said one thing to watch in order to gauge how well Trump is doing would be the small-cap index, Russell 2000, because of the outsize positive impact his tax plan could have on small companies versus large. "If you want a crediblilty barometer, it's the relative performance of small caps versus large caps," he said.
Besides congressional wrangling, markets will be watching durable goods at 8:30 a.m. and manufacturing PMI at 9:45 a.m.
There are also several Fed speeches, including an 8:45 a.m. ET appearance by Chicago Fed President Charles Evans. St. Louis Fed President James Bullard speaks at 9:05 a.m. ET in Memphis at the Economic Club of Memphis Economic Briefing on U.S. Economy and Monetary Policy.
New York Fed President William Dudley speaks at 10 a.m. in a fireside chat at York College with business and economics students.