Congressional fumbling over health care could signal more volatility for stocks, but no correction is expected in the near future as long as President Donald Trump's pro-growth agenda remains largely intact.
Strategists say the market could see a decline of more than 5 percent, but it's not likely to drop the 10 percent, which would signal a full-blown "correction," as investors and Washington turn their focus to tax cuts. Since peaking earlier this month, the S&P 500 is now down about 2.6 percent. The benchmark index was down more nearly 1 percent Monday before significantly paring losses.
Stocks had largely been gliding higher since Election Day, with the S&P 500 up 10 percent amid the prospect of a faster-growing economy and tax policy that could give a kick to corporate earnings. However, the first big test of the president's ability to work with the Republican-led Congress didn't go well, and a bill to replace Obamacare failed last week without going to a vote.
"I believe you can argue that there were actually fundamental underpinnings to this move in the market. It wasn't just some euphoria or expectation of tax cuts. That's part of it. I can't tell you how much," said Bill Stone, chief investment strategist at PNC Wealth Management.
"I don't think [stocks] will give up the full 10 percent. ... I don't think this moves us back to correction territory. Are we overdue for a sell-off? Heck yeah, but I think you look at it as an opportunity to buy. It's not something to run away from," Stone said.
The House gave up on health-care legislation on Friday afternoon, once it looked impossible to win approval of a plan that would replace Obamacare. Killing the Affordable Care Act would have eliminated a slew of taxes, including a higher capital gains tax for the wealthy. Passage of the bill to replace it would have given House tax writers more flexibility.
"Where this sell-off goes is very dependent on how Washington reacts here. I think there's a good chance as we pivot to focus on tax reform, you get a bigger push from the administration and that could reverse this sell-off and push the market higher," said Dan Suzuki, Bank of America Merrill Lynch equity strategist.
The so-called Trump trade, which took off after the election, started to fizzle late last year and has been battered this year as stocks likely to benefit from his policies have been smacked around. Financial stocks, for instance, are still higher since Election Day, but year to date, they are flat. Many infrastructure plays, like Fluor, Manitowoc and United States Steel, are negative ins 2017. Small caps, with their "buy American" appeal, have also floundered. The Russell 2000 is down nearly 1 percent this year, while the S&P 500 is up more than 4 percent.