In a note to investors, Principal Global Investors chief global economist Bob Baur noted that “the cyclical rebound in financial markets stalled so far this year, inducing many to believe that the reflation trade was over” despite surveys indicating that investor confidence remains high.
“After all, inflation is no longer increasing and, while confidence surveys were extremely strong and improving, the hard data to validate that confidence has been slow to come through,” Mr Baur said.
“Ever since the financial crisis, no other mild growth acceleration has been sustained and the consensus is that this uptick will meet the same fate.”
Mr Baur said this was unlikely to be a reversal of the recent rebound but looked more like a pause, “a consolidation of the sharp stock market gains of 2016”.
“We think the stage is being set for further expansion, where growth will rekindle in a month or two, giving another leg higher in the stock market,” he said.
“This will likely happen once the evidence builds that economic growth is healthy and robust, and that this uptick can last.”
Evidence for this theory can be seen in the increasing Chinese growth, consumer confidence reaching its highest level since 2008 and US GDP growth picking up, Mr Baur said.
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