Adam Shell

USA TODAY

Political turbulence in Washington finally morphed into market risk on Wall Street, putting a dent in the 401(k) account balances of investors who until now had been benefiting from the "Trump Rally."

The Dow Jones industrial average closed down 372.82 points, or 1.8%, to 20,607, Wednesday — its biggest daily point and percentage drop in eight months — as mounting political troubles for Donald Trump have raised fears that the president will have difficulty getting his economic agenda passed through Congress.

"There's a growing concern that the Republicans in Congress are going to become so preoccupied with the White House mess that they won't be able to move on their agenda," which includes a plan to cut taxes and sizable spending on infrastructure, said Tom Block, a policy strategist for Wall Street research firm Fundstrat Global Advisors.

Thanks to the market's "Trump Bump," someone who had invested $100,000 in an index fund tracking the 500 largest U.S. companies on Election Day would have seen that money grow to $112,300 at the market's recent record high on May 15 after a 12.3% rally. But that same investor would have suffered a loss of roughly $2,044 in Wednesday's stock selloff which resulted in a 1.8% loss for the S&P 500 stock index.

Stocks sold off on reports that Trump back in February allegedly asked then-F.B.I director James Comey if the law enforcement agency could shut down its probe of ex-National Security Adviser Michael Flynn. This latest controversy follows news earlier this week that he disclosed classified information to Russian diplomats. There are also ongoing questions over the Trump campaign's ties to Russia leading up to last year's presidential election.

The U.S. stock market, which had been moving steadily higher in calm trading since Trump was elected, is suddenly showing signs of nervousness. Wednesday's selloff marked the first time Trump's woes have had an outsize negative effect on stocks. Investors had been focusing on an improving U.S. economy and strong corporate earnings in the first quarter rather than the president's struggle to push forward his economic proposals.

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Investor jitters were also visible in stocks' wild price swings, with the Dow closing down more than 300 points for the first time since Sept. 9 and the market-leading Nasdaq composite declining 2.6% Money also moved into so-called safe haven assets, such as gold, which rallied 2% to $1,260.40 per ounce, and U.S. government bonds, where the yield on the 10-year Treasury note dipped to 2.22%, its lowest level since mid-April. A closely watched Wall Street "fear gauge," which had recently touched a 24-year low, jumped more than 40% Wednesday, although the fear level remains below its longer-term average.

Reasons why so-called political risk is now a market risk:

* Economic agenda in doubt. A lot of the "Trump Rally" has been driven by Wall Street's belief that the president's agenda is what's needed to boost the economy. Trump's proposal to slash the corporate income tax rate to 15% from 35% is viewed as a boon for corporate profitability, while his plans to spend $1 trillion over a decade to fix the nation's roads and bridges was seen as benefiting Main Street by creating more jobs.

But proponents of the Trump agenda now worry it may get sidetracked, which means their outlook on the economy could dim.

"We saw a clear market reaction to the risk of deferred policy action," said Brad McMillan, chief investment officer at Commonwealth Financial Network.

"If Trump's latest controversy spins out of control, at some point investors might feel that he has less sway with lawmakers than he does now and his agenda has a lower chance of happening," adds Thorne Perkin, president at Papamarkou Wellner Asset Management. "Stocks will feel some pain. It's that simple."

* Investor psychology suffers jolt. Trump's latest controversy, which involves potential obstruction of justice, is nearing a more dangerous level, said Michael Farr, president at investment firm Farr, Miller & Washington. "While the White House has successfully dodged a number of thorny issues so far, the accusation of documentable obstruction of justice reaches a new level of possible peril," Farr said. "This may be the event that turns the emotional and psychological tide."

* Uncertainty spikes. Washington politics has become so unsettling and unpredictable that investor uncertainty might rise enough to cause market participants to leave the market until they get a better handle on how things will play out.

"Politics is the one outlier," said Perkin. "Even though stocks are in the sweet spot with economic growth strong, inflation tame, corporate profits robust and consumer confidence high, politics are very unsettling. Markets like certainty and predictability. They like to be able to forecast what will happen next. But that's difficult right now."

The latest Trump trouble, which could get worse, is causing a "long-overdue" drop in stock prices Wednesday, said David Kotok, chief investment officer at Cumberland Advisors.

"The catalyst is the Trump debacle," Kotok said. The risk is "a bogged-down, dysfunctional government becomes too distracted to advance legislation like tax reform. Markets and business need and want a tax reform bill."