At the end of the first quarter, global markets were mired in a weak macro environment, precipitated by the conflict in the Middle East. A shutdown of the Strait of Hormuz had severe implications. A protracted supply-driven energy shock would lead to a daisy chain of problems for global growth, inflation, and asset prices. Then, on March 31 st , the first sign of an end to the conflict brought a sharp reversal in sentiment. It set off a strong tone for risk appetite that carried for much of the second quarter.

The velocity of the rally in risk assets during April was historic. The S&P 500 shot up a staggering 10.4% during the month, and the rally continued into May. Credit spreads tightened dramatically. However, caution is warranted. The move in Treasury yields suggests that the economic outlook remains muddier than equity index multiples would have us believe. Multiple forces put upward pressure on interest rates during the quarter, particularly on the front end of the yield curve. Inflation measures remained uncomfortably north of the Federal Reserve target. A labor market that is both tight and accelerating (as measured by non-farm payrolls), robust consumer spending, and significant corporate capital expenditures, led to +2.7% GDP growth in the first quarter year-over-year, and +2.1% on a sequential basis.