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2017-01-17 20:57:15
Run-Up Since Election Slows as Investors Consider Risks

With just days to go before the inauguration of Donald J. Trump as president, once ebullient markets have eased a bit as investors have begun to ponder more seriously the risks of a Trump administration.

After a run-up in the weeks after Mr. Trump’s election victory, stock markets in the United States have been little changed in the last month — with investors on several occasions stepping back, as opposed to elevating the Dow Jones industrial average past a 20,000 milestone.

The concerns include a dollar that has gained too much in value, worries about trade wars with China and Mexico and, most broadly, a fear that Mr. Trump will not be able to deliver on his promises to cut taxes, increase government spending and reduce regulation.

The market declines in recent weeks have been very modest, and investors, for now, seem to be prepared to give Mr. Trump the benefit of the doubt on his plans for the economy.

Nevertheless, in the wake of his unpredictable Twitter posts, last week’s news conference and Mr. Trump’s tough talk about China, a mood of caution has tempered earlier bouts of euphoria.

Mr. Trump’s comments over the weekend about the dollar being too strong, about the possibility that more countries will follow Britain out of the European Union and his intention to tax German carmakers for not building factories in the United States all heightened these concerns.

“People are concerned about an appreciating dollar, how much higher rates will go and antagonizing China,” Laurence D. Fink, the chief executive of the asset management giant BlackRock, said in an interview last week. “There has been too much conversation about the glories of the U.S. stock market.”

On Tuesday, the dollar’s main index, which is measured against the world’s top currencies, dropped by more 1 percent. Even beaten-down currencies like the Turkish lira and the Mexican peso — among the world’s weakest performers in the last month — gained ground against the dollar.

Economists have warned that an overly strong dollar can hurt the United States economy in several ways. America’s trade deficit would widen as exports stagnate and cheaper goods from Mexico and China flood the market. A long period of a strong dollar also increases the chances of an emerging market crisis, when crucial investment funds flee currencies that are plummeting against the dollar.

The price of gold, a traditionally safe investment, was up by nearly 1.5 percent on the day. The price of the 10-year Treasury note rose, driving its yield — an important benchmark for interest rates — down to 2.33 percent from the previous close, 2.4 percent, a sign that investors are searching for safety instead of returns by loading up on government bonds.

And stocks in the United States continued to search for direction in the absence of tangible developments on Mr. Trump’s plans for the economy.

The Standard & Poor’s 500-stock index closed at 2,267.89 on Tuesday, down 0.3 percent. The Dow Jones industrial average ended down by the same percentage, at 19,826.77. The Nasdaq composite index fell 0.63 percent to 5,538.73.

Mr. Fink’s view, which is shared by many investors with a global outlook, is that while the president-elect has made bold promises about the need to energize what has been a tepid recovery for the nation’s economy, such transformations do not occur quickly.

“These things take months and years to do,” Mr. Fink said.

While stock market specialists are in broad agreement that the Trump rally has more room to run, some are beginning to question whether the marked increase in stocks has gone as far as it can without tangible policy results in the form of lower taxes and government spending initiatives.

“I wonder if the euphoria has exceeded the fundamentals,” said David Lafferty, chief market strategist for Natixis Global Asset Management. “The stock market is pricing in a Reagan-type scenario.”

Like many, he worries that such a bout of fiscal expansionism so late in the economic cycle will lead to a sharp increase in prices and a sudden move by the Federal Reserve to play catch-up by raising interest rates faster than the market expects.

Economists and investment strategists are also warning of possible global shocks that could unnerve the markets in the next year.

While some of these upsets may be driven by the growth of populist political movements, across Europe in particular, this higher volatility would kick in as central banks cease intervening so aggressively in markets.

Jens Nordvig, a currency specialist at Exante Data, highlighted three such concerns in a recent letter to clients. He cautioned that it had been 15 years since the last full-fledged emerging market crisis and pointed to Turkey’s plunging currency and capital outflows in China as two areas of concern.

He also listed a potential breakup of the European Union and any move by Mr. Trump to impose tariffs or other penalties on imports as events that could destabilize markets.

“It is a complex world, with messy answers to questions that seemed simple fairly recently,” Mr. Nordvig wrote in his note. “And in this world, significant macro shocks will be more prevalent.”