Stocks Post Biggest Drop of Year

Bets that President Donald Trump would prioritize business-friendly policies led investors to pile into stocks and the dollar following the election while selling bonds. But lately, some investors and analysts have expressed concerns that popular trades are getting overbought, making them vulnerable to a sharp pullback.
Many also say the prospect that House Republicans will be unable to gather the votes they need this week to dismantle the Affordable Care Act is adding to doubts that Mr. Trump will be able to push through tax cuts. That could put further pressure on stocks that have been trading near records and at historically high valuations.

“People are nervous that if the health-care bill doesn’t pass — and right now it doesn’t look like it will — what it means for other policies,” said Ian Winer, a head of equities trading at Wedbush Securities.
The Dow Jones Industrial Average fell 237.85 points, or 1.1%, to 20668.01, posting its worst day since September. The S&P 500 fell 29.45 points, or 1.2%, to 2344.02 and the Nasdaq Composite lost 107.70 points, or 1.8%, to 5793.83.
Stocks started the day higher, but sold off with other risk assets as several postelection bets reversed course.
The KBW Nasdaq Bank Index of large U.S. commercial lenders fell 3.9%, posting its worst day since the Brexit selloff.

Industrial stocks, which surged after the election as investors bet Mr. Trump would boost infrastructure spending, fell 1.5% in the S&P 500. Shares of steelmaker Nucor lost 3.34, or 5.2%, to 61.33.
Government bonds strengthened. The yield on the 10-year U.S. Treasury note fell to 2.432% from 2.472% on Monday. Yields move inversely to prices.

The dollar, which reached a 14-year high after Mr. Trump’s victory, fell to its lowest level in more than four months. The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, lost 0.4%.
Some analysts said it wasn’t a surprise to see stocks pull back after a prolonged period of gains. Before Tuesday, the S&P 500 hadn’t closed at least 1% lower since October.
“I think we sometimes forget, we haven’t had a big move to the downside in a while,” said JJ Kinahan, chief market strategist at TD Ameritrade.

The percentage of investors who think the dollar is overvalued has risen to 32%, the highest since June 2006, Bank of America Merrill Lynch said in a report Tuesday. And about a third of investors think equities are overvalued — the highest rate in 17 years, BAML said.
“Some of the things folks are betting on have had a huge run — it’s a crowded trade,” said R.J. Grant, director of equity trading at KBW Inc. “Now we need to see more of these assumptions coming true, like regulations and taxes.”

While improving earnings and a strengthening economy have allowed investors to be more patient than they might normally be in waiting for policy details, “Trump’s ability to get things done will stay at the forefront of investors’ minds,” said Katie Nixon, chief investment officer at Northern Trust Wealth Management.

“Every program, whether it’s the Affordable Care Act or the travel ban, is being interpreted as information in how successful he’ll be in getting his bigger strategies enacted. If Republicans can’t coalesce around the Affordable Care Act, can they do it around tax reform?” Ms. Nixon said. – WSJ