The capital markets continually offer up uncertainty and confusion. A "Chekov's gun" mindset to market analysis will likely result in terabytes of data mining, great mental anguish, but perhaps little else. Rarely do any markets follow the careful sequencing of a well-crafted spy novel or a tightly written screenplay. In fact, it might be said that the incoherent jumbled mess of a Michael Bay directed movie is logical and cohesive by comparison. As a tangent, the current administration and both political parties seem to be giving Michael Bay a serious run for his money. Fortunately for investors, the markets appear to be ignoring both domestic and global political dysfunction. Despite all the noise, a couple of clear themes emerged in the second quarter: For risk assets, any news was good news, and there has been a shift in messaging from the Federal Open Market Committee (FOMC).
Second quarter returns for traditional assets were strong across the board with global equity markets continuing to dominate (see Figure 1). Carrying on the theme that has been in place since the start of quantitative easing, equity or credit of most varieties proved to be rewarding. Despite the FOMC raising rates and signaling more to come, long dated treasuries rallied strongly, outpacing the S&P 500. Two of the more popular explanations for the flattening are: The bond market is telling the FOMC that they should not be raising rates at this juncture and the talk of several more rate moves and balance sheet unwinding is just that, talk.
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