Sentiment in Washington has shifted: There is now more that can go wrong than right, many say.
The Dow Jones Industrial Average posted its biggest decline in three months on Thursday, one week after a similar selloff of similar scale sent stock indexes tumbling around the world.
Investors are running out of reasons to keep buying U.S. stocks, exposing a growing number of warning signs. The historic calm that enveloped U.S. stocks for much of this year has been upended twice in the past two weeks. Some analysts say it is too soon to call the end of the eight-year bull market in stocks, but many agree the indiscriminate optimism that characterized the post-election rally is evaporating.
Political rifts, including President Donald Trump’s deteriorating relationship with several business leaders in the wake of the Charlottesville, Va., demonstrations, have magnified investors’ doubts about the administration’s ability to accomplish its agenda, in particular the tax cuts they had anticipated would boost corporate profits. Those expectations contributed to a stock-market rally that has sent the S&P 500 up 13% since Election Day.
Shares of small-capitalization stocks in the U.S., among the market’s biggest postelection winners, have given up virtually all their 2017 gains. The Russell 2000, the benchmark for “small-cap” mutual funds, is up just 0.05% for the year and is down 6.4% from a high hit in late July. Such shares rose to records late last year as investors bet that Mr. Trump’s plans to roll back regulations and taxes and pump money into infrastructure projects would benefit smaller, more domestically focused firms.
U.S. government bonds have strengthened this year, reflecting investors’ continuing demand for relatively safe assets and their doubts about the prospect of supercharged U.S. economic growth and inflation under Mr. Trump.
Nearly 33% of investors surveyed by the American Association of Individual Investors said they expected stock prices to fall over the next six months, the highest level since May.
Investors point to concerns about pockets of the economy, the Federal Reserve’s plan to raise interest rates and unwind its balance sheet, and doubts that earnings can continue to grow at a solid pace.
The cascade of negative developments is a sign investors can’t rely on the enthusiasm that underpinned the market for months.
Concerns over lofty valuations have caused some investors to already trim their exposure to U.S. stocks, instead favoring safe haven assets such as gold and silver.