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The Gloom Encroaching on Trump’s Stock Boom

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The good times President Trump brought to the stock market may be ending.

The Standard & Poor’s 500-stock index is down nearly 7 percent from its peak in late September, and the Nasdaq index, which includes many hot technology stocks, has fallen nearly 10 percent from its high.

Doubts appear to be overwhelming investors’ bullishness. They are concerned that Mr. Trump’s bellicose trade policy will disrupt corporate America’s supply chains and push up costs. Mr. Trump’s tax cuts have contributed to a ballooning fiscal deficit. Borrowing costs have also risen this year, which could dampen investment.

“Donald Trump has made uncertainty great again,” said David Rosenberg, chief economist of Gluskin Sheff. “His policies are doing more harm than good.”

The market reaction is a stark reversal. Investors had piled into stocks with abandon for much of Mr. Trump’s presidency. Taxes and regulations were being slashed, earnings were surging and the United States economy was performing better than many of its rivals. The S.&P. 500 is up 28 percent since Election Day 2016.

Crucially, to investors, it is not clear when the threats to the stock market will lift. But until they do, stocks could remain weak.

The market plunge does not seem to fit with the strong economic data. Unemployment is at a multi-decade low, the economy grew at a 4.2 percent clip last quarter and corporate earnings, the biggest driver of stock prices, are expected to rise more than 20 percent this year.

But this good news, according to some analysts, had caused investors to underestimate a number of concerns.

“There was this great sense of complacency,” said Jim Paulsen, chief investment strategist at the Leuthold Group.

This could be seen in the stock market’s stretched valuations. Earlier this year, the S.&.P 500’s price-to-earnings ratio, a yardstick that compares stock prices to past earnings, hit its highest level in over 15 years. But investors kept buying stocks in the expectation that the strong earnings growth would continue. Much of the growth this year came from the tax cuts enacted at the end of 2017. As a result, investors expect slower earnings growth in 2019.

Not even Mr. Trump’s hard-edge trade policies could shake investor faith in stocks. After the Trump administration forged a trade truce with the European Union over the summer, Wall Street seemed to grow comfortable with the trade war, and stocks resumed their climb.

But in recent weeks, investors became newly worried about the trade tensions with China, which the United States has targeted with tariffs on $250 billion of its goods. The battle could now have an outsize effect on the stock market. Technology companies, whose stocks have risen strongly, may be among those most harmed. The tariffs along with China’s retaliatory measures make it harder for them to operate and expand their finely honed supply chains.

Investors have also grown concerned about the Federal Reserve. For much of the year, they seemed to believe that the central bank would continue to gradually raise interest rates without significantly slowing the economy and disrupting financial markets. But with a strong United States economy, it’s not clear when the Fed will stop raising interest rates.

The growing fiscal deficit illustrates how investors suddenly had to grapple with the flip side of a policy — Mr. Trump’s tax cuts — that they had favored. The lower taxes immediately bolstered companies’ bottom lines, but the federal government’s revenues fell short, forcing the government to sell more debt. The interest payments on Treasury securities are now higher than they were during the Great Recession.

In any sell-off, it’s important to keep things in perspective. Even after the past week’s drop, the S.&P. 500 is still up 2 percent this year. Retail investors appear to be well ahead. Households’ holdings of mutual funds have risen by $1.9 trillion since the third quarter of 2016, according to figures from the Federal Reserve.

Long-term rallies in stocks are often punctuated with corrections, or declines of 10 percent or more from their most recent high. If another occurred this year, the S.&P. 500 would be down only 1 percent this year. Investors can most likely stomach that. The Fed can always choose to hold off on raising interest rates.

Larry Kudlow, President Trump’s economic adviser, on Thursday sought to calm nerves. “If you have a strong economy, that will provide confidence for stocks, but corrections come and go,” he told CNBC.

The big question now is whether the stock market rout is a signal that the economy is set to slow markedly. Analysts are looking at trading patterns to determine whether that is the case. They note that so-called defensive stocks, like utilities, have outperformed companies in other sectors.

Bank stocks, which usually do well when the Fed raises interest rates gently, have lagged the wider market for months. Investors may be betting that banks will have less business because the economy is about to slow. A handful of large banks, including JPMorgan Chase and Citigroup, are scheduled to report third-quarter earnings early Friday.

Mr. Paulsen predicts that the economy’s growth rate will fall back toward 2 percent. “If it does, how will Trump act?” he said.

A correction was made on 
Oct. 11, 2018

An earlier version of this article misstated in one instance the surname of the analyst who predicted that growth would slow to 2 percent. He is Jim Paulsen of the Leuthold Group, not “Mr. Leuthold.”

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A version of this article appears in print on  , Section B, Page 3 of the New York edition with the headline: As Doubts Multiply, Gloom Is Encroaching on President’s Market Boom. Order Reprints | Today’s Paper | Subscribe

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