Few would have predicted that the impressive equity performance would be accompanied by a 10-year U.S. Treasury rate as low as 1.85 percent, a 10-year German government bond (bund) rate as low as 1.29 percent and gold as high as $1,596 an ounce. Think of this as the markets' way to signal to investors some key issues for the quarters ahead.
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The persistence of this unusual combination of bond, equity and gold prices speaks to how central banks around the world - and the Federal Reserve and European Central Bank in particular - have fueled risk taking in the face of rather sluggish economic growth, recurrent concerns about European disruptions and lingering worries about geopolitical risk.
In the weeks ahead, we will get a sense of central banks' willingness to continue to support asset prices pending a stronger and more comprehensive recovery in economic growth.
I suspect that, notwithstanding some internal opposition, they will signal continued resolve as a way to enhance - via the wealth effect and animal spirits - prospects for growth and jobs. Indeed, the willingness call is a relatively easy one. The much more difficult call relates to the sustained ability of central banks to maintain control over the range of competing and conflicting forces.
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Investors are unable to refer to historical precedents or reliable models to predict confidently what lies ahead as:
1. The scope and scale of central bank policy experimentation are already unprecedented.
2. The imposition of capital control by a euro zone country (as occurred this week in Cyprus) was deemed so remote as to be essentially unthinkable.
3. And - particularly with what is happening in Afghanistan, North Korea, Pakistan and Syria - even the most experienced analysts struggle with some of the world's most volatile areas.
Looking ahead, the validation of prices in risk markets needs the fuller engagement of healthy balance sheets and more robust economic activity, including what my PIMCO colleague Saumil Parikh refers to as the transition from "assisted growth" to "genuine growth."
While there is reason to expect that this will continue to occur gradually in the U.S. absent political/policy disruption), it will unfortunately not happen in Europe for quite a while.
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Effective central bank intervention remains critical to the well being of the equity market in the quarters ahead. Actions need to be strong enough to offset Congressional dysfunction and headwinds from abroad. But if too strong, they would damage for a long time the functioning and integrity of markets.
Central banks did a good job in striking this balance in the first quarter. The hope, going forward, is that they remain not just willing to do so but also able.
Mohamed A. El-Erian is the CEO and Co-CIO of PIMCO, which oversees $2 trillion in assets including the PIMCO Total Return Fund, the largest bond fund in the world. His book, "When Markets Collide," was a New York Times and Wall Street Journal bestseller, won the Financial Times/Goldman Sachs 2008 Business Book of the Year, and was named a book of the year by The Economist and one of the best business books of all time by the Independent (U.K.).