# Is the so-called ‘reflation trade’ over? Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2017-05-23 Category: BUSINESS Category URL: https://financedigest.com/category/business Meta Title: Investors concerned about Trump's political troubles: Meta Description: Get the latest insights from Heartwood Investment Management's Michael Stanes on the impact of President Trump's political challenges on the global URL: https://financedigest.com/is-the-so-called-reflation-trade-overhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/img0166-1828-1736843837174-compressed.jpg) By **Michael Stanes,** Investment Director at Heartwood Investment Management Confidence in President Trump’s ability to execute his pro-growth agenda has further evaporated as more allegations have come to light around the Trump campaign’s possible collusion with the Kremlin in November’s election. Risk aversion took hold mid-week, with investors growing less optimistic that tax cuts, infrastructure spending and deregulation will be executed. The [dollar has fallen by 6% on a trade-weighted basis from its post-election high set](https://www.financedigest.com/battered-sterling-gets-respite-but-set-for-weekly-fall-vs-dollar.html "Battered sterling gets respite but set for weekly fall vs dollar") in December 2016. Against the rising tide of political headlines, investors are determining whether the reaction to political events is just a temporary setback or if this unwind signals something more sinister. Headlines are fluid and it remains too early to [draw any concrete conclusions](https://www.financedigest.com/johnson-urges-caution-on-drawing-conclusions-from-falling-covid-cases.html "Johnson urges caution on drawing conclusions from falling COVID cases") about Trump’s political troubles. However, we would caution that the so-called ‘reflation trade’ was not solely premised on Trump’s ability to deliver significant fiscal easing, but also reflected the overall improvement in [global economic](https://www.financedigest.com/putin-says-west-is-triggering-a-global-economic-crisis.html "Putin says West is triggering a global economic crisis") conditions and fading disinflationary effects that began in the summer of 2016. So far, our key takeaways are: - **The magnitude of the [market moves](https://www.financedigest.com/these-days-tik-tokers-can-move-markets-more-than-investment-analysts.html "These days Tik-Tokers can move markets more than investment analysts…") seen is relatively modest: The** S&P 500 remains at near record highs and has risen 14% since November’s US election (in US dollar terms). US equities have given back just over 1% of those gains. Furthermore, the implied measure of volatility of the S&P 500 Index has spiked but remains low on a historic basis. - **The fundamental backdrop has not shifted:** As stated above, the [global economy](https://www.financedigest.com/global-economy-collapse-just-one-click-away.html "Global economy collapse just one click away") was on a recovery path before Donald Trump’s election victory which was supported by the recovery in commodity prices, a stable US dollar and the impact of policy easing in China. US [economic fundamentals remain](https://www.financedigest.com/german-economic-growth-to-remain-muted-in-near-term-imf.html "German economic growth to remain muted in near term – IMF") firm. The economy is at full employment, further highlighted by this [week’s jobless](https://www.financedigest.com/u-s-weekly-jobless-claims-fall-layoffs-lowest-in-more-than-21-years.html "U.S. weekly jobless claims fall; layoffs lowest in more than 21 years") claims report showing claims at a multi-decade low. We [expect tight labour market conditions to underpin wage growth](https://www.financedigest.com/dollar-jumps-as-u-s-job-gains-wage-growth-beat-expectations.html "Dollar jumps as U.S. job gains, wage growth beat expectations") and consumption. Importantly, the corporate sector is recovering, which is evidenced by rising business spending and improving corporate profitability. US companies had their best quarterly earnings season in the first quarter since 2011. According to FactSet, blended [earnings growth](https://www.financedigest.com/bone-growth-stimulators-market-is-expected-to-earn-a-valuation-of-us-2-1-bn-by-2027.html "Bone Growth Stimulators Market is Expected to Earn a Valuation of ~US$ 2.1 Bn by 2027") for S&P 500 companies was 13.6% (based on 91% of companies reporting). The largest contributor to the profits recovery was the energy sector, due to the [oil price](https://www.financedigest.com/oil-prices-stay-firm-on-fuel-demand-despite-covid-19-surge.html "Oil prices stay firm on fuel demand despite COVID-19 surge") rebound. However, even excluding energy, blended earnings [growth still rose by 9.4% and suggests that the improvements](https://www.financedigest.com/polypropylene-fibre-market-witness-a-spike-in-growth-pace-recent-improvements-in-pricing-models-fmi.html "Polypropylene Fibre Market Witness a Spike in Growth Pace Recent Improvements in Pricing Models: FMI") were broad based. Elsewhere, the eurozone economic recovery appears to be well supported as credit growth recovers and business and [consumer confidence](https://www.financedigest.com/asian-shares-rise-after-consumer-confidence-boosts-nasdaq-to-record-high.html "Asian shares rise after consumer confidence boosts Nasdaq to record high") remains high. China’s growth remains stable and [Japan’s economy](https://www.financedigest.com/japans-economy-likely-shrank-in-q3-on-weak-consumption-output-reuters-poll.html "Japan’s economy likely shrank in Q3 on weak consumption, output – Reuters poll") is benefiting from stronger external demand. - **Liquidity continues to drive financial markets as global [central bank](https://www.financedigest.com/central-banks-opt-for-shock-and-awe-to-tame-inflation.html "Central banks opt for shock and awe to tame inflation") policies remain accommodative.** We believe the US Federal Reserve remains on course to lift interest rates in June as it seeks to gradually normalise monetary policy from historically low levels. We recognise that we are in the latter [part of the market](https://www.financedigest.com/the-automotive-aluminum-extruded-parts-market-to-climb-upwards-through-innovation-at-a-cagr-of-5-8-between-2021-and-2031.html "The Automotive Aluminum Extruded Parts Market to climb upwards through innovation at a CAGR of 5.8% between 2021 and 2031") cycle and sentiment is likely to remain vulnerable to pressure points as we move through the year. However, we are maintaining our modest overweight exposure to [global equity](https://www.financedigest.com/global-equity-funds-see-large-outflows-on-slowdown-worries.html "Global equity funds see large outflows on slowdown worries") markets, believing that the fundamental backdrop remains constructive for financial markets in the shorter term. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---