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Since the global financial crisis a decade ago, a few simple guidelines have helped investors make sense of the markets.
Global growth and inflation will be perpetually weak. Central banks will help by keeping interest rates low. And stocks will almost invariably rise.
The rulebook is now changing, a shift that is sending tremors through the financial markets. The Standard & Poor’s 500-stock index fell by more than 4 percent on Monday, deepening its losses from the previous week and erasing its gains for the year. The Dow Jones industrial average sank by 4.6 percent. Bond yields, the basis for key borrowing costs such as mortgage rates, have risen fast in recent weeks.
Investors are digesting the growth prospects for the world — and rebalancing their views on the risks and rewards of investing in risky assets like stocks compared to safer spots such as government bonds.
The world’s largest economies are all expanding, as the most important central bank, the United States Federal Reserve, is actively draining billions of dollars from the financial system and raising interest rates. And investors are concerned that tenuous signs of inflation could mean central banks will start to remove their support even faster.
New leadership at the Fed is adding a degree uncertainty. Jerome Powell was sworn in as the 16th chairman of the United States Federal Reserve Monday, after the departure of his predecessor Janet Yellen. The markets don’t have a clear understanding of exactly how Mr. Powell’s views on unemployment and inflation will translate into action.
A rocky patch for the markets could become awkward for President Trump. He has repeatedly claimed credit for surging stocks, while business optimism over his push to cut taxes and lessen regulation has helped fuel the “Trump Bump.”
Mr. Trump’s habit of regularly boasting about stock market surges is a practice other presidents avoided. They knew that what goes up may go down again, and they did not want to take the blame for market forces beyond their control.
Stocks surged broadly during the president’s first year in office. By late January the S.&P. 500 was up 27 percent since Mr. Trump’s inauguration. But the last few days of trading cut that gain to just 17 percent, especially after the sharp declines on Monday.
“When you get this kind of selloff it kind of feeds on itself,” said Mike Ryan, chief investment officer for the Americas at UBS Wealth Management.
While the market opened lower, it actually had climbed into positive territory early in the day. But the declines snowballed throughout the afternoon. The 4.1-percent drop was the worst for the S.&P. since August 2011.
Back then, the sell-off followed growing concern about a chaotic budgeting process in the United States. A showdown between Congress and the Obama administration over the debt ceiling brought the country to the brink of default. In response, credit rating firm Standard & Poor’s stripped the United States of its triple-A rating, spooking markets.
The economy today is in tricky territory from a markets perspective. While investors have been excited about the prospects of the tax cuts, they are also fretting that the government may be spending too much to pay for them.
Economists often advise governments to run large deficits during recessions to stimulate growth. But the United States economy is already strong.
It grew at an annual pace of 2.6 percent last quarter. Unemployment was 4.1 percent January.
In essence, the $1.5 trillion tax cut is stimulus that the economy doesn’t need. The extra money raises the prospect that the economy could overheat, stoking inflation.
“We’re pouring a tremendous amount of fuel on the fire,” said Rick Rieder, who oversees roughly $1.7 trillion in assets as global chief investment officer for fixed income at asset manager BlackRock.
Global investors are also trying to navigate a changing economic backdrop.
After years of sluggish growth, major economies in Europe and Japan now appear to have good momentum. On Monday, an index of eurozone purchasing manager activity, considered a good gauge of economic growth, hit a 12-year high, suggesting that the surprisingly strong European economy has further room to grow.
Against that strength, investors are wondering whether those central banks will tamp down on their efforts to help growth, which could send interest rates higher. The European Central Bank has indicated it could pull back, depending on the economic conditions.
The weakness on display in the United States set the tone for foreign markets. Japan’s Nikkei 225 dropped by 2.6 percent on Monday. Benchmark equity indexes in France, Italy and Spain all fell by more than 1 percent.