Dow Tumbles 450 Points As D.C. Uncertainty Fuels Stock Market's Worst Month Of 2021

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Topline

Stocks fell sharply Thursday afternoon as lawmakers in Washington, D.C., struggled to come to terms on spending measures investors have been anticipating for weeks, with one key Democratic senator saying he’ll only support a massive social spending package encompassing many of President Joe Biden’s policy priorities if the price tag is cut by more than half.

Key Facts

Though stocks started the day with modest gains, the Dow Jones Industrial Average tumbled 466 points, or 1.4%, to 33,924 by 1 p.m. EDT, setting the index up for its first monthly decline since June.

Meanwhile, the S&P 500 fell 0.9%, while the tech-heavy Nasdaq dipped 0.3%, putting each index about 5% below all-time highs set earlier this month.

Stocks started dropping shortly before noon Thursday, as House Speaker Nancy Pelosi (D-Calif.) reiterated plans to move forward with a vote on a $1.2 trillion bipartisan infrastructure proposal despite opposition from House progressives, who’ve insisted they’ll only support the Senate-passed bill once the Senate moves forward on a $3.5 trillion social spending package, which funds initiatives to battle climate change and expand social safety benefits.

Losses worsened after Sen. Joe Manchin (D-W.Va.), whose vote is crucial given Democrats’ one-vote lead in the chamber, announced he supported cutting the giant bill’s total price tag down to $1.5 trillion. 

Adding to the uncertainty, Manchin also conditioned his support on the Federal Reserve ending its unprecedented pandemic-era stimulus efforts, which have helped the market rally to new highs and include historically low interest rates and monthly asset purchases of $120 billion to inject cash in the economy and help bolster spending.

Consumer staples and industrials stocks, two sectors that have climbed in anticipation of the heightened fiscal spending, headed up losses in the S&P on Thursday afternoon, falling 1.5% and 1.4% respectively.

Key Background

Lawmakers are facing a slew of critical deadlines in the coming weeks as they race to avert a looming government shutdown and a debt default, all while Democratic leaders try to push forward Biden’s agenda. In addition to the infrastructure vote likely to come Thursday, the Senate is expected to vote on a measure to suspend the debt limit for another year as soon as next week. On Tuesday, Treasury Secretary Janet Yellen, who’s warned the potential default could trigger an “economic catastrophe,” said the department will likely exhaust its ability to pay the nation’s bills by October 18, but Republicans have thus far insisted they won’t support the House-passed bill, insisting Democrats should instead wrap the measure into a budget plan to pass on a one-party basis using a special process called reconciliation. Schumer, however, struck down that option Thursday, saying the “drawn out, unpredictable process” risked taking too long and “needlessly endangering the stability of our country.”

What To Watch For

The House and Senate are expected to pass a stopgap funding measure to avoid a government shutdown on Thursday afternoon, leaving enough time for the bill to make its way to Biden’s desk before current funds expire at midnight. 

Tangent

In an afternoon note, market analyst Adam Crisaffuli, founder of Vital Knowledge Media, said he’s “most concerned” the “severe bout of gridlock” in Washington could force lawmakers to cut back on spending plans more than investors have anticipated. Though Crisafulli believes it’s likely a debt ceiling solution will ultimately be found, he says the “fact it’s being used as a negotiating tool for the first time in years obviously is a negative.” 

Further Reading

Republicans Block Democratic Effort To Raise The Debt Ceiling As Officials Warn Of Economic Catastrophe (Forbes)

Yellen Warns Treasury Stands To Run Out Of Cash On October 18, Causing ‘Serious Harm’ To Business (Forbes)