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“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.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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