Run-up since election slows as investors consider risks

Fears include over-valued dollar, trade wars with China and Mexico, Trump not delivering on tax cuts

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 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 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 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 Trump’s tough talk about China, a mood of caution has tempered earlier bouts of euphoria. 

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 antagonising 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 US stock market.”

On Tuesday, the dollar’s main index, which is measured against the world’s top currencies, dropped by more 1 per cent. 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 per cent 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 per cent from the previous close, 2.4 per cent, 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 Trump’s plans for the economy.

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

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 energise 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,” 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.

© 2017 The New York Times News Service