In what has felt like a broken record, markets across the board performed well in the quarter. Emerging markets were strong, European markets were strong, credit markets were strong, property markets were strong and sentiment was strong. US markets, after bouncing around early in the quarter, really took off in September and posted a string of records that continued into the new quarter.

As the Economist summarized, "Today ... America and much of the rest of the world are amid a bull market in almost everything: stocks, bonds and property are all strikingly expensive compared to long-term averages, and getting more so." Should investors interpret this performance as indicative of improving economic conditions or are they being, as Tom Petty sang, raised on promises?

One thing we do know is that all of this appreciation has occurred in the context of an increasing array of obvious risks. Grants Interest Rate Observer picked up on one particularly illustrative example in its September 22 edition. Grants reported on the Toys 'R' Us senior unsecured 7 bonds of Oct. 15, 2018 noting, "It was no secret that the financial position of Toys 'R' Us was deteriorating, that $400 million of debt, including the above-cited 7 s, was maturing in a year's time and that the rating agencies were looking askance on that paper ..."

Despite such clear warnings, the market seemed to neither see anything nor hear anything as the bonds "spent the summer vacation lounging in the vicinity of 95 cents on the dollar." It wasn't until "Early September rumors of a debt restructuring" that the bonds prices started falling precipitously and catching up to reality. On Monday, the 18th, the company filed for bankruptcy; "On Tuesday, the bonds traded at 26." Can such insensitivity to deteriorating conditions be,Grants rightfully queried, "emblematic of healthy, functioning capital markets?"

Zerohedge noted similar market dynamics. Aleksandar Kocic from Deutsche Bank observed that "volatility continues to be unfazed by what lies ahead ..." The report continued, "not only is the market not discounting the future as Matt King postulated several months ago, but it is no longer able to even respond to the present ..." In other words, "As the markets are getting inoculated against event risk, volatility continues to be under pressure," an assessment corroborated by, "the lowest average September VIX on record ..."
Michael Lewitt presented his take on market activity in the October 1 edition ofThe Credit Strategist. Lewitt described, "The pathology of the stock market was on full display on September 11th when the Dow rose more than 250 points and the S&P 500 jumped more than 25 points as Florida was rocked by Hurricane Irma. And the virus just spread during the rest of the month. The worse things got, the higher stock prices rose." Finally, as recent Nobel winner, Richard Thaler, remarked, "We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping.”