US Markets

How to play the reflation trend: Tom Lee

Economy might finally be seeing reflation: Pro

The market is seeing signs that inflation is creeping back in and deflation may no longer be a worry following a bullish jobs report, Tom Lee, Fundstrat Global Advisors head of research, said Monday.

"I just think it's a good reminder that there's a lot more going right in our economy than wrong," he told CNBC's "Squawk on the Street." "And I think a good labor print, along with the fact that inflation expectations are improving means the economy might be finally be seeing reflation."

After the April jobs report was released Friday, the Dow Jones industrial average gained 1.5 percent on the day, and the rose 1.4 percent.

The U.S. added 223,000 jobs in April, roughly in line with analyst expectations for 224,000 nonfarm payrolls.

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Lee said he is feeling good about the market after Friday's rally and is optimistic about the consumer. He pointed to one development that the broader market is not paying attention to: Companies that have increased capital expenditures are outperforming.

"That hasn't happened for four years," he said, adding, "I think it shows you that buying back stock when earnings yields have fallen doesn't make as much sense as maybe investing capital."

He continued to say: "I also think it's a signal about inflation. We're talking about no longer having to worry about deflation, right? That was the big issue earlier this year. And as we see normalized inflation, you want to buy capex growers."

Improved performance among financial stocks is another reflationary signal, Lee said.

"They're beneficiaries of a steepening curve. If consumers start to spend and lever up, and I think housing is definitely telling us this, it's very bullish," he said.

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John Silvia, chief economist at Wells Fargo, noted that the United States is short of consensus for economic growth for the year, and gross domestic product may be dragged down by weakness in exports as the dollar strengthens.

However, he agreed with Lee that the U.S. consumer is leading the economy.

"It's really key to distinguish what's happening when you say economic growth domestically versus that GDP, because that gross domestic product number picks in that net exports," he said. "So if you're an investor looking at the retail sector and the American consumer, you're actually pretty positive here."

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He explained that relatively low inflation may be masking gains in consumer spending and retail sales.

"There's a real distinction to be made between real consumer spending, which continues to move forward, as opposed to retail sales, which is a nominal number depressed in part by the lower inflation numbers," he said.