(Bloomberg) -- For the first time, a Wall Street that’s been giddy over Donald Trump is starting to ask some hard questions.

From Day 1, markets have rallied, defying what many of the same Wall Street types said would be a disastrous election outcome.

Since then, U.S. stocks have hit record after record, driving up shares of Goldman Sachs to JPMorgan Chase to Apple, as investors quickly focused on what his pro-business, tax-cutting agenda would mean for corporate profits.

But the steady drumbeat of bad news may finally be taking its toll.

On Wednesday, stocks tumbled, Treasuries soared and volatility came roaring back as a series of damaging revelations -- from Trump’s disclosure of classified information to Russian officials to reports that he pressed FBI Director James Comey to drop a probe into former National Security Adviser Michael Flynn -- prompted many on Wall Street to wonder whether the turbulence that has shattered the market’s calm might be the start of something bigger.

It’s also left many to ask whether the market was blinded by its own optimism over Trump’s business-friendly agenda.

“Crazy times, huh?” said Matt Maley, an equity strategist at Miller Tabak & Co. “I’ve talked to a few personal friends and a few customers who I know are supportive of Trump that are saying, boy, this isn’t good.”

Of course, financial markets are often punctuated by bouts of alarm that have unsettled traders during normal times. And up to now, it’s been easy to dismiss the president’s missteps as the price of electing an outsider. But now, the biggest question is whether Trump’s presidency is in trouble.

For some of the world’s largest banks, Trump’s firing of Comey last week was a signal moment.

At least two global firms have started mapping out how financial markets might react to an impeachment -- a scenario they still saw as improbable, according to people with knowledge of the matter, who declined to speak publicly because such deliberations are politically sensitive.

While their work is just beginning and it’s too early to draw conclusions, the people said, it’s a telling sign of just how serious things have become.

“The political risk has been upped here -- things sound more ominous and serious than a week ago,” said Gary Pollack, the head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit.

Much of the problem is how pervasively investors had tuned out Trump in the months before the latest scandal broke. The CBOE Volatility Index’s average level since December has been 25 percent below that of 2016 -- not exactly a turbulent year to begin with. Everything from Treasuries to currencies and stocks had been limping along without a care -- before Wednesday.

“Markets are very blasé about political risk until the very last moment,” former Federal Reserve Chairman Ben S. Bernanke said at the SkyBridge Alternatives Conference, known as SALT, in Las Vegas. “They go along until something happens that pulls the rug out from under their assumptions.”

The S&P 500 Index, which set another all-time high just two days ago, was routed in the worst selloff in eight months, while the Dow Jones Industrial Average’s 372-point slide was its steepest since the election. The dollar fell a sixth day, while yields on 10-year Treasuries tumbled by the most since the day after the Brexit vote.

Trump is facing the deepest crisis of his presidency after contents of a memo written by Comey surfaced Tuesday, alleging that the president asked him to drop an investigation of Flynn. That came after Trump disclosed highly classified intelligence to Russian officials in a meeting last week.

“The market is running with politics,” said Bret Barker, who oversees U.S. fixed-income at TCW Group Inc., which manages $194 billion. “There’s just not much out there to change fundamentals right now.”

A vacuum of catalysts faced anyone hoping the traditional saviors of markets would step up to calm things down. Earnings season is over, the next report on U.S. employment is 16 days away, and the Fed doesn’t meet again for a month. That’s potentially bad news for a stock market whose 10 percent rally since Election Day has pushed valuations to the highest levels since just after the dot-com bubble.

The biggest beneficiaries of the Trump trade were bearing the brunt of the carnage on Wednesday. Exchange-traded funds tuned to stocks with the most sensitivity to market swings were having their worst day in two months. Bank shares in the S&P 500 plunged 3 percent, bringing the slide from a March 1 record to 8.6 percent.

“That’s one of the problems with rather a quiet market that even a small ripple could look pretty big,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management. “Sometimes if it’s too quiet, people think things can only get worse.”

Instant Insights /

Trump turmoil has Wall Street cheerleaders facing hard questions

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