Monday's market action amounted to a fairly benign volley in a series of shots Wall Street is sending to Washington: Get your act together, or else.
Republicans failed last week to push a much-vaunted health-care plan through Congress, sending a signal that President Donald Trump's ambitious economic agenda could be in peril. The thinking went that Trump failed his first test despite having a solid majority in both chambers on Capitol Hill.
Until the past two weeks or so, investors brimming with optimism about the new administration have been fairly patient about the pace of change. They pushed the up as much as 10 percent after the November election, but the rally has cooled lately and major averages edged mostly lower Monday.
The index has fallen 2.4 percent since the early-March top and faces a sharper pullback on further hiccups in the legislative process.
"The failure to pass the American Health Care Act calls into question those optimistic assumptions about the capacity of Trump and the Republican-led Congress' ability to pass complex, impactful legislation," Mark Doms, senior economist at Nomura, said in a note.
Mohamed El-Erian, the chief economic advisor at Allianz, recently wrote an opinion piece for Project Syndicate positing that the U.S. is in a "confidence economy," or one that is operating strongly on sentiment. Confidence surveys that generate "soft" economic data have been strong; "hard" readings of actual activity been middling.
If the new president doesn't produce some specific policy proposals that make the two mesh, trouble may not be far away.
"Unless the Trump administration can work well with a cooperative Congress to translate market-motivating intentions into well-calibrated actions soon, the lagging hard data risks dragging down confidence, creating headwinds that extend well beyond financial volatility," El-Erian wrote.
Volatility low, and that could be bad
The market's new skepticism about the Trump program comes at a sensitive time.
Stock market volatility is at its lowest level since 1972, with only two daily moves of more than 1 percent in 2017, according to Convergex. Such quiet historically has been followed by periods of heightened volatility.
The political risks in the current climate only add to the feeling of some stormy times ahead.
"From a political perspective, we think the key issue is whether the president will encounter similar problems with his tax reform agenda, which is likely to be as complicated as health care reform, if not more so," Bob Doll, chief equity strategist at Nuveen Asset Management, said in a note Monday to clients. "If political turmoil is ongoing, higher risk, cyclical areas of the equity market would likely remain under pressure."
Still, by midafternoon the major averages had shaved away much of the day's losses, as investors reversed what at one point looked like the sharpest downturn of the nascent Trump era.
The prevailing narrative that better growth is ahead perhaps may not have carried the day, but at least it mitigated the damage from the worst political loss yet for the White House.
"The drumbeat of America is alive and well," said Rob Lutts, chief investment officer at Cabot Money Management. Companies "are willing to invest in the U.S. and our president is encouraging it in a new way that I've never seen a president do before. That's extremely positive. I do believe we'll get past this."
Lutts, like many in the market these days, does worry about valuations.
The market is trading around 18.3 times forward 12-month earnings, about 2 percentage points above the historical norm. That's a level that reflects high enthusiasm for what's ahead, and could easily deflate should reality not reflect hope.
"This obviously is uncharted territory," Lutts said. "We have never had this kind of leader in the White House and these kinds of initiatives with this kind of leadership that doesn't have a political background. There is a real risk that things get delayed in respect to what people are expecting."
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