Worries about Italy's political turmoil sent U.S. stocks falling like a Ferrari on a ski jump, and some advisers warned that the situation could become more serious in the short term.
The Dow Jones Industrial Average fell 505 points at its low Tuesday before finishing the day down 391.64 points, or 1.58%. Of the 30 Dow stocks, only one – Coca-Cola – rose. The yield on the 10-year Treasury note fell to 2.77%.
The proximate cause of the downturn was political turmoil in Italy, as the government blocked the formation of a coalition government between the ultra-right League party and the antiestablishment 5-Star party, raising the prospects of new election and, ultimately, withdrawal from the Eurozone.
"The markets are tumbling today due to the worrisome political situation in Italy," said Phil Shaffer, founder of Halite Partners. "This is just another chapter in the European debt crisis contagion saga. The impact of austerity measures taken after the credit crisis have led to the rise of European populism. The situation has the making of a potential European collapse as the story unfolds, but the story is currently far from over."
Christian Thwaites, chief strategist at Brouwer & Janechowski, agreed. "We absolutely should be concerned about the situation," he said. "Greece and Cyrpress were small and containable. Italy is the third-largest country in the European Union, and that's including the United Kingdom. The fear here is that the two parties are talking openly about exiting the Eurozone and the same kind of reforms that the new Greek governmetn was talking about."
And Italy isn't the only thing to worry about. "Italy's dysfunctional political system is being blamed, but the seeds for this decline were sown a week ago when market internals began to deteriorate as prices went higher," said Paul Schatz, president Heritage Capital. "The news today just accelerated the pullback."
Sam Stovall, chief investment strategist for U.S. equity strategy at CFRA, noted that increased volatility is common in the second and third quarter of a midterm election year. "It looks like the market is looking for a reason to go down, and it's saying, 'Let's blame Italy,'" he said. "But the volume wasn't great, and how excited can you be about a downturn if the volume isn't there to confirm it?"
Leon LaBrecque, managing partner and chief executive at LJPR Financial Advisors, agreed that Italy may just been a convenient excuse. "The Italians have been having political crises as long as there have been Italians," he said. "And, if political crises did have lasting effects, then what about Greece, Brexit and Trump? More likely the market overreacted, and this is a buying opportunity. Stay calm, this opera has just started, and [the fat lady] hasn't even started to sing. "
Advisers said that being proactive during the year has helped soothe clients. "We've told clients we're not in any foreign bonds at all," Mr. Thwaites said. "But we have some sophisticated investors who wanted to know what all this means. "
Others said that clients have been extremely calm. "I have not heard from any clients today," said Tim Holsworth, president of AHP Financial Services "My clients rarely react to a bad day or week. Overall, I think they are far more optimistic since the presidential election."