Dow drops 200 points in volatile trading as investors wait for stimulus update from Washington

Stocks slipped from record highs on Friday as lawmakers rushed to bridge differences on additional coronavirus stimulus measures.

The Dow Jones Industrial Average fell about 220 points, while the S&P 500 dipped 0.7%. The Nasdaq Composite traded 0.4% lower. All three indexes touched new intraday highs in morning trading after closing at records in the previous session.

Leaders on Capitol Hill said they are close to an agreement that would provide $900 billion in additional aid. The talks, which have stretched on for months, are up against the wire, with federal funding lapsing at 12:01 a.m. ET on Saturday.

Senate Majority Leader Mitch McConnell, R-Ky., said Thursday that a “bipartisan, bicameral agreement appears to be close at hand.” He noted it was “highly likely” Congress would work through the weekend, and said lawmakers may have to pass a short-term funding measure to buy enough time to approve legislation.

House Speaker Nancy Pelosi, D-Calif., also said Democrats were moving closer to a consensus. “We made some progress this morning” and “are waiting to hear back,” she told reporters on Thursday.

The stock market is expected to experience massive volume on Friday as Tesla’s historic entry into the S&P 500 is poised to occur based on prices at Friday’s close. There will be a rush of activity into the final bell and the S&P 500 will begin trading with Tesla as a member on Monday.

With a market capitalization of more than $600 billion after a 700% rally this year, the electric carmaker will be joining as the seventh-largest company in the index. 

Tesla is being added to the benchmark in one fell swoop, marking the largest rebalancing of the S&P 500 in history. It’s estimated that passive funds tracking the S&P 500 will need to buy more than $85 billion of Tesla, while selling $85 billion of the rest of the index to make room for it.

Shares of Tesla jumped as much as 4% to hit an all-time high on Friday. As of 11:20 a.m. ET, more than 38 million shares of Tesla have changed hands, already exceeding 85% of its 30-day average volume.

Several major exchange-traded funds like the Invesco QQQ Trust (QQQ), which mirrors the Nasdaq 100, will be rebalanced alongside the S&P 500 Friday.

Meanwhile, the Tesla inclusion coincides with a quarterly event known as quadruple witching, when options and futures on indexes and equities expire. Many expect Friday to be one of the busiest trading days of the year.

The major averages are on track to post modest gains for the week. The S&P 500 is up 1.6% this week through Thursday’s close, heading for its fourth positive week in five. The Dow has gained 0.9% in this period, while the tech-heavy Nasdaq outperformed with a 3.1% rally for the week so far.

This week’s gains came amid optimism toward a stimulus deal as well as the vaccine rollout. On Thursday evening, Food and Drug Administration advisors overwhelmingly backed Moderna’s Covid vaccine, a key step towards public distribution approval by the FDA. The first inoculations in the U.S. were given Monday with Pfizer and BioNTech’s vaccine.

Investors were betting that a rise in Covid cases as well as disappointing economic data would push lawmakers to cement a new aid package. Jobless claims last week hit their highest level since early September, while retail sales fell more than anticipated in November.

“The bad news this week is that the third wave continues to get worse, and the economic damage from the pandemic continues to mount,” said Brad McMillan, chief investment officer at Commonwealth Financial Network. “The good news is that policy is starting to succeed in containing the virus, and the federal government will likely pass a stimulus bill, mitigating both major risk factors.”

McMillan said investors should expect more volatility in the short term amid developments on the stimulus and vaccine front, before the economy returns to growth in 2021. “With vaccines now available and ramping up, we are at the end of the beginning of the pandemic, and markets recognize that,” he added. 

Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.