Inflation could be the market's biggest upside surprise of the year

  • There's an under the radar trend which could push stocks further into record territory.
  • Portfolio strategist Joseph Zidle's leading indicator has to do with a tightening labor market driving up wages.
  • He says the scenario could help drive inflation to three to four percent, a number that's considered a sweet spot for U.S companies' profits.

There's an under-the-radar trend which could push stocks further into record territory, and it appears most of Wall Street doesn't even know about it.

"I think inflation will be the big surprise," said Joseph Zidle, portfolio strategist at Richard Bernstein Advisors on CNBC's "Trading Nation" this week.

His leading indicator: A tightening labor market that is driving up wages.

"This economy is really based on consumption, so it puts more money in the hands of consumers," he said, thus giving a boost to U.S. companies selling products and services.

Zidle referred to Commerce Department data showing the number of people voluntarily leaving their jobs, relative to the amount of people getting fired.

"More and more people are quitting their jobs right now," he observed. "In the law of large numbers, the only reason why people quit their jobs in big numbers is because they have something better lined up and something that pays more."

The scenario could help drive inflation to three to four percent, a number that's considered a sweet spot for companies' profits, explains Zidle.

"If we do start to see this inflation, I think it's very good for cyclicals because they have pricing powers — your energy, materials, tech, financials, small companies. I think it's very, very good for them," he said.

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Although it isn't a situation that appears to be on the Federal Reserve's radar right now, that doesn't mean it couldn't soon surface as an issue.

The Fed has been taking a slow and steady approach to raising rates. The Wall Street consensus predicts the next quarter point interest rate hike will happen at the culmination of its next meeting on June 14.

However, the threat of rising prices could alter the Fed's deliberative approach.

"It could force the Fed's hand. The Fed historically tends to get behind the curve, and the economy tends to grow faster than what they're thinking," Zidle said. "It could cause the Fed to hike more aggressively than people think."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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