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Assessing the stock market boom

Why has the US stock market done so well in the past year? What might happen in the near future? Robert Baur, chief global economist for Principal Global Investors, analyses worldwide trends that help answer such questions.

He joined The Principal in 1995 and was global head of trading before taking on his current role. The following conversation has been edited for length and clarity:

Q. What's going on with the world economy today?

A. The global economy today, (for the first time since the Great Recession), is in the midst of a synchronised economic upturn, mild in some places but still accelerating in others. What we're seeing today is a sustainable expansion around the world.

From the summer of 2007 to the summer of 2016, there was a series of financial crises in one place or another. It started in the US in 2008 and part of 2009, and then in Europe in 2011, 2012 and 2013. Then in 2015 in China, there was a huge stock market meltdown and surprise devaluation. And all during that time, we had very, very slow growth, or slowing, depending on the country.

That long period is now over, and the global economy is coming out of a near-decade period of economic turmoil and malaise. What we're seeing is a sustainable expansion around the world.

Europe seems to be in a very strong upturn. Japan appears to be coming out of some doldrums. And China's growth is certainly stable at fast levels. With that in mind, other emerging markets as well as Canada and Australia seem to be doing pretty well too. It's pretty well synchronised.

Q. Is that a reason for the stock market rally we've seen in the past year or so?

A. It's been a recovery from what was a real economic slowdown around the world in 2015 as a result of the huge surge in the US dollar and decline in oil prices. We've seen a rebound in earnings in the US, first quarter earnings were quite strong.

Q. The US Federal Reserve and other central banks are looking at removing some of the stimulus they've provided by raising interest rates. Is that a threat?

A. I don't think it's a worry, yet. If you do have a synchronised global upturn, then it makes sense that central banks in some sort of gradual, synchronised fashion are starting to remove some of (their stimulus).

A little bit longer term, there could be upward pressure on interest rates around the world. If that happens, that could impose some sort of correction on the stock market.

Part of what's been behind the big rally in the stock market has been super-low interest rates. But, if suddenly we see 10-year Treasury yields at three per cent or higher, that may cause people to rethink the discount rate they're using on future earnings.

We could see a little more than a 10 per cent correction, it could be 20 per cent. If that happened, though, I think we'd see long-term interest rates come right back down, and then the stock market would probably rally.

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