The U.S. economy appears to be gaining strength as most data points suggest improving economic conditions (click IRM Index for current chart). The broader market is climbing the wall of worry to new record highs and credit risks are declining in tandem. Both the Dow and the S&P took out their May 2015 highs, while NASDAQ and Russel have now reached positive territory year-to-date.
The rally seems to be well supported by improving fundamentals and record high idle cash put back to work in equities, while yields in the U.S. bond markets are historically low or even negative in many international sovereign bond markets.
Chart: IRM Index
On its way to new highs the S&P has witnessed a flash crash, record selling pressure in January and geopolitical risk including U.K.'s Brexit vote and a coup in Turkey. These events led volatility and credit spreads significantly higher during the last 12 months, however, the S&P broke out to new all-time highs, when earnings reports showed a better picture of corporates than the market expected.
If economic conditions continue to improve, the weakness in the broader market that kicked off in early 2016 might resemble the early stage of a secular bull market with meaningful upside, based on improving fundamentals and attractive relative valuation in equity markets, when compared with record low yields on bonds.