Last week, the big story was Brexit – the British exit from the European Union.  For US investors, the shock hit the markets hard, but the recovery was almost nearly as swift.  Was this because the United States is somehow immune to a slowdown in global growth?  Is the market signaling that the Brexit may not actually happen, and that there is greater optimism in global equities?  To answer this question, let’s take a look at another proxy for global risk – the US bond market.  Traditionally, when stocks are up on market optimism, bond prices go down and yields go up since optimistic investors require a greater return from the bond market.  That isn’t what’s happening now.  Rather, treasury bond yields are hitting record lows.  The 10 year Treasury note hit a record 1.378%; the 30 year is at 2.164%.  In other words, if global investors are giving the US government their money for 10 years, they will only require a 1.3% return on that long term investment.  That probably won’t be enough return to keep up with inflation.  That isn’t a sign of optimism, but of fear.

So, if the fear of a global slowdown, stemming from Brexit’s increasing list of political and financial impacts, continue to mound, why are US equity markets so resilient?  Put succinctly, it looks like global equity investors have not rewarded all countries equally.  The US equity markets may have largely recovered but the developed country index (MSCI EAFE) is still trading 4% below its June 23^rd, the day before Brexit, level.  When all of your options are not great, you sometimes have to go with the one that’s least bad.  Right now, for dedicated equity investors, the US stock market looks like the cleanest dirty shirt.