(Bloomberg) — Wall Street’s capacity to process drama got another workout in a week of rapid-fire headlines on tariffs, inflation and the Federal Reserve. Traders proved equal to the task, once again.
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From bonds to credit and equities, a standard pattern is emerging in a world beset with uncertainty. Jarring day-to-day swings set an emotional tone for investors — only to dissipate as the sessions wear on. Take government bonds. After falling more than 1% after Wednesday’s discouraging inflation report, a popular long-dated Treasury ETF was close to erasing losses for the week, with soft retail data revitalizing bets on interest-rate cuts. Stocks, meanwhile, closed near all-time highs on Friday, with tech sentiment of late proving particularly febrile.
The overall result is a steady — if improbable — fall in pan-market turbulence, even as some measures of policy risk imply a backdrop as unsettled as any in nearly three decades. Weekly moves in 10-year Treasuries have been stuck in a tight range, for the longest such streak in eight months. Volatility in credit has plummeted and is receding as fast as it whips up in equities.
Call it conditioning — the refusal of investors to repeat past mistakes that proved costly when a host of seemingly intractable macro threats quickly faded. The dynamic has played out repeatedly over the previous two presidential administrations, when everything from Covid to Fed rate hikes and Donald Trump’s trade bluster failed to dent Wall Street’s risk-on march.
“The fear of missing out is more than theoretical. There are real-world consequences for trying to time the market if you are wrong,” said Chris Zaccarelli at Northlight Asset Management. “Investors have been conditioned. Those that went to cash in 2022 have been punished and that is the recency bias impacting a lot of people’s thinking.”
Investors had no shortage of event risk to manage in a week that saw Trump pledge to impose reciprocal tariffs on US trading partners, a report showed consumer inflation rising, and Fed Chair Jerome Powell conceded that more work is needed to wring price pressures out of the economy.
In the end, none of it landed in markets. The S&P 500 climbed around 1.5%, near records, while 10-year Treasury yields fell for a fifth straight week, in the longest such rally since 2021. Junk bonds ETFs are back to scoring gains, as gauges measuring their volatility versus risk-free rates narrowed.
