Recent strong economic numbers have not led to higher equity prices or Treasury yields (despite continued outsized deficits). This may be more reflective of the new post-bubble environment than seen last year - characterized by long overdue balance-sheet adjustments contributing to insufficient aggregate demand relative to supply. In other words, worldwide economic growth (running way below potential) will not reduce current excess global capacity anytime soon. One need only look at Japan over the last decade to appreciate the corrosive effect this can have on wages, prices and profits to say nothing of equities.
The current global demand/supply imbalance will likely lead to continued deflationary pressures squeezing profits and limiting the upside for equities, notwithstanding some select pockets of strength (see our previous features – Equity Valuations and Equities in Transition).
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