Didn’t Sell in May? Good call - the week ahead

Bar a September stock market wobble - and history shows they sometimes happen at this time of year - investors will be celebrating a powerful summer rally by the time of next week’s St Leger Day horse race in Doncaster.

That’s the second part of the old stock market adage that tells investors to ‘sell in May and go away, don’t come back ‘til St Leger’s Day’. It often fails to deliver - unsurprising, given the tendency of markets to rise over time - but it rarely falls over as spectacularly as it has this year.

Since Donald Trump’s U-turn on tariffs in early April - when he paused levies for 90 days a week after imposing them - shares have soared. The S&P 500 is up from a low of below 5,000 to 6,500 last week. Here, the FTSE 100 has risen from 7,700 to 9,300. While in Japan, the Nikkei is up from 31,000 to 43,000 today.

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New school year, same political fears

So, investors come back to their desks enjoying the warm glow of big summer gains, but their optimism is tempered with plenty of caution. Top of the list of worries is political uncertainty around the world.

In the US, the focus is on the President’s ongoing assault on Federal Reserve independence. Relentless personal attacks on Fed chair Jerome Powell have been augmented with the attempted sacking of board member Lisa Cook - she’s fighting back.

That’s triggered plenty of hand wringing, with an FT poll of leading economists warning that markets have not priced in the impact of a Fed that’s in the pocket of the government. Investors are not yet factoring in a blow to the credibility that the central bank currently enjoys as the guardian of US monetary integrity.

A Fed more concerned about protecting jobs and keeping the cost of borrowing low for the US government risks letting inflation spiral out of control. That would lead to higher borrowing costs and undermining faith in US Treasury bonds, the bed-rock of the global financial system.

• Read our latest articles on US markets

Budget trouble

Elsewhere, the concern is focused on governments struggling to balance their books. In France, embattled Prime Minister Francois Bayrou has called a vote next week on €44bn of tax rises and spending cuts. Opposition parties have promised to vote him down and a third government collapse in a year is on the cards. French 10-year government bond yields are above 3.5%, a high since the Eurozone debt crisis a decade ago.

Meanwhile, here in the UK, MPs return to Westminster amid frenzied speculation about what Chancellor Rachel Reeves has in store for the Autumn Budget, expected to be held in November.

With tariffs, slowing growth and a cost-of-living crisis clouding the outlook, many fear another big tax raiser is coming down the track. And having ruled out tinkering with the big revenue earners - income tax, National Insurance and VAT - the government may have little choice but to target property and wealth next.

It’s all still speculation, but capital gains tax on primary homes is in the spotlight. As is an overdue revisit of council tax, which still uses 1991 house values. A single annual levy on higher value homes - replacing stamp duty and council tax - is one possibility.

Needless to say, all of this would be politically contentious, but it is possibly unavoidable given a persistent gap between what the government wants to spend and what it is able to raise in taxes.

• Read our latest articles on UK markets

Safe havens

Political concerns and worries about stretched stock market valuations are unsurprisingly raising the appeal of traditional safe haven investments like gold. At nearly $3,500 an ounce, the precious metal has now doubled in value in three years. Meanwhile, silver is catching up fast. At $40 an ounce, it has also doubled since October 2022.

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Coming up this week

With the US enjoying Labor Day and the second quarter earnings season now done and dusted, it’s a relatively quiet week for number crunchers. On the radar at the end of the week, however, will be the latest snapshot of the health of the US jobs market - the non-farm payrolls release.

Last month, a subdued 73,000 new jobs, and downward revisions to the prior two months’ numbers, prompted investors to price in a greater chance of an interest rate cut later this month. Although Jerome Powell has hinted at a first cut since last December, that will be dependent on incoming data between now and the 17th of the month. Friday’s labour market report will be a key focus.

• Read: What can we expect in the Autumn Budget?
• Read: 5 common IHT scenarios - from best to worst
• Read: How to prepare for an AI stock market tumble

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of  Fidelity’s advisers or an authorised financial adviser of your choice.