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Since Trump’s win, investors have fallen for 'fairy dust': Citi economist

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Citi economist Bill Lee: Investors are too optimistic

Stocks have soared to all-time highs since the election of Donald Trump, but some market watchers may say the rally has gone too far, too fast.

William Lee, head of North America economics at Citigroup, said Thursday on CNBC's "Trading Nation" that the markets have gotten "way ahead of themselves" on hopes that financial services regulations will ease and the government will spend bigtime on infrastructure under Trump's administration.

"Everyone is sprinkling around the word 'infrastructure' like some fairy dust. Like somehow, infrastructure is going to make the world better. Yes, it could, but not the kind of fiscal infrastructure spending that President-elect Trump is talking about," Lee said.

Lee said Trump is referring to private companies financing infrastructure investment largely associated with major toll roads and bridges, which represents less than 1 percent of all roads in the U.S. According to Lee, such infrastructure spending would make a minor dent in the "infrastructure rebuilding we really do need."

The prospect of increased infrastructure spending sent the price of industrial metal copper to a 16-month high in the days following the U.S. election.

Spending on infrastructure isn't the only facet of market sentiment postelection that leads Lee to believe that investors — and market commentators — are pricing in far too much optimism heading into the new year. And with the U.S. dollar surging, hitting its highest level in over 13 years since the election, along with higher interest rates, Lee said he has in fact marked down his 2017 GDP growth projection from over 2 percent to 1.75 percent.

"Monetary policy is really on hold right now because everyone is trying to figure out exactly what the fiscal contour is going to look like. Our best guess is that there's going to be a positive fiscal impulse that stimulates the economy. But with all of the haggling that's going to go on in Congress, that probably won't hit until 2018," Lee said.

The immediate implementation and effects of a "massive fiscal stimulus program" under Trump that investors anticipate seems far-fetched to Lee, and market watchers are taking for face value the prospect of fiscal stimulus meaning more GDP growth.

But, he points out, "the timing of fiscal stimulus matters, and the timing is going to be further out than investors think."