By Dan Burns and Megan Davies
NEW YORK (Reuters) - Not even a week after the Trump administration and Congress rekindled optimism that they could soon make progress on a pro-growth agenda including tax cuts, the unexpected firing of the head of the FBI late Tuesday presented investors with a fresh reason to second-guess their confidence in the "Trump trade."
At the least, financial market participants viewed President Donald Trump's abrupt dismissal of FBI Director James Comey as an unwelcome distraction, while some fretted it could tie Washington in knots for months, potentially postponing already-delayed reforms.
The takeaway for the stock markets: don’t bet on any quick legislation around trade, the budget, healthcare or infrastructure.
"There is nothing good out of this for markets," said Michael Purves, chief global strategist at Weeden & Co. "It will weigh on Trump's ability to cut deals with Congress. It costs him negotiating leverage."
Jack Ablin, Chief Investment Officer at BMO Private Bank, said, "on a medium-term basis, it does undermine the administration's power to get things done."
Trump's election last November unleashed a powerful upswing in U.S. stock markets on the premise that he would cut taxes and regulation and usher through a major infrastructure spending package. The benchmark S&P 500 <.SPX> has gained 12 percent since Election Day, while shares of tech stocks and smaller companies have performed even better.
Nagging concerns about Trump's ability to get things done, along with some anxiety about stretched equity valuations, have combined to cap the rally, and stocks have done little since early March.
Around midday Wednesday, the S&P was near unchanged, as were other market benchmarks.
The administration recovered some credibility last week when the House of Representatives voted to repeal major portions of former President Barack Obama's Affordable Care Act after failing to do so a month earlier. The simple achievement of advancing the healthcare bill to the Senate had been seen by investors as a signal that enacting tax cuts was doable, the big question was just how soon - this year or next.
"There's a tremendous amount of hope baked into the market that Trump is going to be able to act, particularly on tax reform," said Brad McMillan, Chief Investment Officer for Commonwealth Financial in Waltham, Massachusetts.
Edward Perkin, Chief Equity Investment Officer at Eaton Vance, said if the date to pass tax "is pushed out it's not so much a problem, but if people question if it will ever happen, then that's a problem."
The degree to which this further alienates Democrats on Capitol Hill, especially in the Senate, was another concern given how narrow support has been so far for Trump's agenda.
Sen. Dianne Feinstein, a senior Democratic lawmaker from California, was not optimistic that tensions between the parties would ease anytime soon.
"I had been hopeful that we could have a line of activity that's going to bring a very divided country together," Feinstein told Reuters Wednesday. "The problem out there is that people are so divided."
Should the Comey episode weaken Trump's bargaining ability with lawmakers, it may actually act as a catalyst for a tax bill, just one that might resemble congressional Republicans' version more than Trump's.
"An ongoing special investigation or shift in the balance of power could actually make Trump more eager to sign off" on the previously existing congressional tax plan, analysts at NatWest Markets said.
Of course, some had already adopted the view that Trump's promised reforms were a distant hope, at best.
"Investors are realizing that the fiscal policy agenda is being pushed out farther on the horizon," Michael Arone, Chief Investment Strategist at State Street Global Advisors <STT.N>.
(Additional reporting by Trevor Hunnicutt, Richard Cowan, Sinead Carew, Rodrigo Campos; Editing by Nick Zieminski)