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 rule book 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.
Those sharp moves come as investors digest the growth prospects for the world — and rebalance their views on the relative merits of stashing their cash in risky assets like stocks, safer spots such as government bonds and the myriad investment opportunities offered by a global economy moving in sync.
The world’s largest economies are all expanding, as the most important central bank, the United States Federal Reserve, is 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 around the world will start to remove their support even faster.
It’s an interesting complexity for investors to assess. What’s good for the economy isn’t always good for the markets. The strong job report last week fueled hopes that wage growth would follow. But higher wages could lead to higher inflation, creating new challenges for the central bank to manage.
New leadership at the Fed is adding a degree of uncertainty. Jerome H. Powell was sworn in as the 16th chairman of the Federal Reserve on Monday, after the departure of his predecessor, Janet L. Yellen. The markets do not have a clear understanding of exactly how, if at all, Mr. Powell’s views on unemployment and inflation will differ from that of Ms. Yellen.
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 decrease regulation has helped fuel the “Trump Bump.”
While giving a speech during Monday’s sell-off, Mr. Trump made no mention of stocks. Afterward, the White House instead extolled the “long-term economic fundamentals, which remain exceptionally strong, with strengthening U.S. economic growth, historically low unemployment, and increasing wages for American workers.”
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 those gains to just 17 percent.
Stock Markets in Presidents’ First Year
Percentage changes in the closes of the stock market in the first 263 trading days of each president’s term, compared with President Trump’s, through Monday.
S.& P. 500-Stock Index
Number of trading days
“When you get this kind of sell-off, it kind of feeds on itself,” said Michael P. Ryan, chief investment officer for the Americas at UBS Wealth Management.
Although the market opened lower on Monday, it actually had climbed into positive territory in the morning. 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. Investors have been excited about the prospects of the tax cuts, but 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 solid.
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 may be stimulus that the economy does not 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 the manager BlackRock.
Global investors are also trying to navigate a changing economic backdrop.
After years of sluggish growth, major economies in Europe and Japan appear to have good momentum. On Monday, an index of eurozone purchasing manager activity, considered a good gauge of growth, hit a 12-year high, suggesting that the surprisingly strong European economy has further room to grow.
Against the strength, investors are wondering whether those central banks will tamp down on their efforts to help growth, which could send interest rates higher. Investors are anticipating that the European Central Bank 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.
In trading in Asia on Tuesday morning, markets signaled another tough day. Major stock markets in the region plunged after the drop in the United States on Monday, suggesting the pain could continue. In Japan, stocks were down nearly 5 percent in morning trading, while shares in Hong Kong were down more than 3 percent.
In the United States, financial stocks endured some of the steepest drops, led by Wells Fargo. After the close of trading Friday, the large lender was the subject of an extraordinary regulatory action when the Fed barred it from growing until it improved corporate controls.
Industrial stocks tumbled 4.5 percent. The aluminum maker Arconic fell 8.9 percent after its earnings failed to impress investors. The company also said it would bolster capital spending to ramp up production.
Likewise, ExxonMobil fell 5.7 percent Monday. The energy giant disappointed investors with its quarterly earnings report last week. The energy sector was one of the worst-performing parts of the S.&P. 500, falling by 4.4 percent.
The corporate environment reflects further forces, along with the changing course of global central banks, that could add to the choppiness of markets.
For example, oil prices have risen as global growth has picked up steam. That encourages energy companies like ExxonMobil to increase investment, as does provisions in the tax overhaul that make capital spending more advantageous. ExxonMobil has said it plans to spend $50 billion on investments in the United States over the next five years.
Those investments could be good business moves and help feed into the broader economy. But they could also send share prices lower in the short term, as investors have become accustomed to companies using investment dollars to buy back their own stock, a popular move for corporations in recent years. Goldman Sachs analysts recently noted that corporations themselves represent the single largest source of demand for stocks in the United States.
Now, the combination of global growth and tax incentives to make capital investments “actually completely changed the paradigm to just borrow to buy back your stock,” said Mr. Rieder of BlackRock.