In a week in which technology shares reached new record highs and the valuations of both Amazon and Facebook eclipsed $500 billion, investors should revisit a 2016 trade that many thought had all but died out. Lost in the tech rally is a surprising turn from other cyclical sectors and the glimmers of hope they offer for the broader economy. It included upbeat commentary from bulldozer manufacturer Caterpillar and faster profit growth at aerospace group Boeing.
Investors have long since written the obituary on the so-called reflation trade that gained momentum after the election of Donald Trump last year. Economic growth was supposed to quicken and inflation rise as the new administration pumped billions into infrastructure, cut taxes, and defend regulations. The eulogies may be premature.
While value shares have lagged behind, advancing 4.6% this year to the 16% advance by growth stocks, a turning point may BE in sight. A bounce in US consumer confidence and preliminary manufacturing PMiS were both reported this week, which may bode well for many of the traditional value sectors. The logic goes that if economic activity quickens, investors may no longer need to pay up for growth.
Quant strategists at AllianceBernstein note that, quote, "a value rally would be sustainable with some support from the macro environment." The way they see it, markets will need to see higher interest rates, faster economic growth, or a return to the inflation trade. The market is not currently pricing in that possibility, particularly after the Fed acknowledged several poor inflation reports this week. Investors will have to wait for more progress on the earnings front for confirmation that economic activity is truly improving.
And therein may be the piece of good news. Courtesy of mining group Freeport-McMoRan, this from its CEO, quote, "Chinese demand is better than most expected, and so it's encouraging to see this, to see European demand improving, North America growing at a low rate." that would mean that the reflation story still has some legs and that value stocks could yet find momentum.