Stocks fell sharply Thursday 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.
Though stocks started the day with modest gains, the Dow Jones Industrial Average tumbled 547 points, or 1.6%, to 33,843 on Thursday, posting its worst monthly decline of the year.
Meanwhile, the S&P 500 fell 1.2%, while the tech-heavy Nasdaq dipped 0.4%, 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.
That package would fund initiatives to battle climate change and expand social safety benefits spread out over the next ten years, amounting to a less hair-raising $350 billion a year.
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.
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.”
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.”