“I think there’s a part in each one of us that wants the impossible to happen, and that’s what surprises are.” – Gina Carano

It’s time to consider the very real possibility that we are in the early stages of a cyclically led, emerging market driven melt-up for risk assets.

Don’t talk to me about the elections and how that will impact markets. As Charlie Bilello, our Director of Researchm has shown in a recent blog post (click here to read), not being exposed to equities during election years tends to result in meaningful underperformance over time.

Yes – this is a bizarre election (to say the least) and while it is by no means guaranteed that the S&P 500 (SPY) will close the year up strongly or positive at all, history suggests the odds do favor it. What encourages me here in thinking a real melt-up is about to take place is the room defensiveness (SPLV) has to fall relative to high beta (SPHB) areas of the stock market.

Bonds (TLT) may be on the verge of a sell-off, coinciding with yield curve steepening on reflation hopes. If you like “higher lows,” 10-year inflation breakevens are doing just that. Why does this matter? Because if the bond market is beginning to sense a return of inflation expectations, then the Dollar (UUP) likely weakens (check), emerging markets rally (check), and Financials (XLF) outperform (check).

Few seem to think such a move is possible. It has been a long time since markets were led higher by the “right stuff,” i.e. that which is most sensitive to growth and inflation rising. The hunt for yield distorted market behavior for a long time. This may be the first potential melt-up driven by the areas that should lead risk assets higher.

Badger on.