Contours of expectations

Approaching the Independence Day holiday gives an opportunity to take stock of how the first half of the year has developed in the financial markets. Surprisingly resilient is probably the best description.

After dropping over 15% through early April, the S&P 500 then gained over 23% through late June, and is now up nearly 5% year to date. The yield on the 10-year US Treasury note has ridden a roller-coaster, rising to nearly 4.80%, falling to 4.00%, before ending the quarter near 4.25%. The market’s view of the federal funds rate has also bobbed up and down, going from expecting fewer than two rate cuts this year, to more than four, to now back to more than two. 

Driving this volatility is the uncertainty unleashed by the new administration, primarily relating to trade policy, but also to immigration and its view of Federal Reserve policy. Providing ballast against this volatility has been the steady performance of the US economy. Though consumer confidence initially plummeted, it recovered somewhat, as the labor market plodded along, continuing to add jobs and keeping the unemployment rate in a still-historically low range of 4.0-4.2%.

In turning to the second half of the year, markets still do not have clarity over trade or Fed policy but having tested limits in the first half of the year, it seems as if the contours of expectations have been set.