Key points:

• Most political and geopolitical events have had limited market impact, as they rarely alter long-term economic fundamentals.
• Central bank divergence, with the Fed on hold and the ECB easing, was already priced into bond and currency markets.
• Resilient economic data and no further tariff escalation have supported the market rebound since early April, though uncertainty around trade policy and the economic outlook remains a key risk.

Markets interpret events as either irrelevant, expected, or informative. So while this has been a period of volatile and occasionally alarming news, the market has noticeably reacted to only some of these events.

Irrelevant: Most political events. Recent weeks have seen a number of notable geopolitical and domestic political events that, while important, have not materially altered long-term economic fundamentals.

• Political Demonstrations: Large-scale political protests in the U.S. are historically significant events in a political context. However, markets tend to look through such developments unless they credibly threaten to alter fundamental economic policy or long-term corporate profitability. History shows that political events rarely have a meaningful impact on markets.
• Israel-Iran Conflict: The direct military strikes between Israel and Iran caused a short-term spike in oil prices and a modest flight to safety. However, significant market impact would require a sustained disruption to global energy supplies, such as a closure of the Strait of Hormuz. The modest change in the price of oil reflects an expectation that the conflict will remain contained, treating it as a regional shock with a manageable risk premium rather than a permanent drag on global growth. We continue to monitor the situation for any signs of escalation that could challenge this outlook.

Expected: Monetary Policy Divergence of the Fed and ECB. Markets remained steady as the European Central Bank and the U.S. Federal Reserve took divergent, but widely expected, paths. The ECB’s 25-basis-point rate cut on June 5th was a direct response to its own forecasts of low inflation and low growth, making the move fully priced in. Similarly, the Federal Reserve’s decision to hold rates steady was consistent with persistent inflation and a resilient U.S. labor market. Since both (in)actions were expected, neither decision gave markets new information, resulting in minimal price impact.

Informative: Economic resilience and tariff reprieve. Markets have steadily risen on a series of modest, but positive, data on inflation, jobs, and corporate earnings, particularly in AI-related companies. The broad economic trajectory greatly impacts future wealth. Therefore, a slightly better than expected economic statistic lacks the emotional impact of many news headlines, but can have far more impact on an investor’s portfolio.

The impact of tariff news has been trending somewhat lower, but there remains great uncertainty around future tariff policy and tariffs have a major impact on markets. Therefore, even modest signs of a potential de-escalation are highly informative, providing direct cause for an upward revision to growth and earnings forecasts. Any new, material developments on trade could meaningfully reshape market expectations.

Takeaways:

• Markets effectively process news and adjust prices accordingly (informative).
• Investors are better off not responding to emotional headlines (irrelevant) or even economically meaningful information that has already been priced into markets (expected).
• Although reacting to news is generally unproductive, it is important to stay diversified and adapt portfolios when market conditions meaningfully change.