Final fling for investors - the week ahead

Investors with a long memory will be wondering if they have seen this movie before. Despite widespread political turmoil, a nervous bond market and the soaring price of gold, stock markets remain firmly glass-half-full. A late cycle melt-up in share prices looks to be underway.

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Political upheavals

The backdrop could hardly be less auspicious. Here in the UK, an embarrassing tax slip by the deputy prime minister triggered a cabinet reshuffle that changed every job except the one that every investor is focused on - that of the embattled Chancellor Rachel Reeves. She remains in place at least until she has delivered what’s expected to be an unpopular tax-raising Budget in late November.

Meanwhile, France’s government looks set to fall if, as expected, a confidence vote undermines prime minister Francois Bayrou. In Japan, the resignation of Prime Minister Shigeru Ishiba has set in train weeks of uncertainty ahead of a leadership election in October.

In all three cases, political turmoil has been felt most clearly in nervous bond markets where yields on long-term government bonds - the ones most impacted by stability and inflation concerns - are rising fast. Here in the UK, they stand at a multi-decade high of over 5.5%.

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Gold still shining

Bonds may be under pressure but one asset to have benefited from political uncertainty - not just in Europe and Japan, but even more acutely in the US - is gold. This week, the precious metal burst through $3,600 an ounce for the first time as investors sought out a safe haven from the inflation that many fear will be the inevitable consequence of Donald Trump’s ongoing attack on the independence of the Federal Reserve.

As the Fed prepares for 2025’s first cut in interest rates next week, investors are fretting about whether a new era of ‘fiscal dominance’ beckons in which the central bank is subservient to the needs of the Treasury, keeping interest rates artificially low in order to boost growth and maintain a low cost of borrowing for the government. Goldman Sachs this week said gold could rise as far as nearly $5,000 an ounce.

• Read our latest articles on gold

Final fling

But the one asset class that seems blithely unconcerned by all this uncertainty is the one that most investors care most about - the stock market. Shares continue to view the glass as very much half full as they anticipate lower interest rates, more government spending, continuing corporate earnings growth and ever higher valuation multiples.

As we approach the three-year anniversary of the market low in October 2022 after interest rates started to rise in the face of a post-Covid inflation spike, shares have now nearly doubled in three years. Standing back from this cyclical rally, the longer-run secular bull market that rose from the rubble of the financial crisis also looks long in the tooth. At 16 years old, this bull market is starting to rival the epic gains achieved in the 1950s and 1960s and later in the 1980s and 1990s.

Nervous market watchers are questioning whether we are starting a re-run of the late-cycle melt-up that marked the end of the second of those two bull markets. The dot.com bubble was a kind of final fling for equity investors that may have a reprise as loose monetary and fiscal policy collides with a positive artificial intelligence growth story. It could be an exciting ride for investors, but one that could end in the same way - with a bursting of the bubble and subsequent correction. Shares lost half of their value between 2000 and 2003.

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This week on investors’ radar

The first big test of that positive equity market story will be next week’s meeting of the Federal Reserve’s interest rate setting committee. The expectation is firmly baked in that rates will fall by at least a quarter percentage point next week, and perhaps more. Before we get there, however, we have to navigate this week’s inflation data in the US. An above-target rate of 2.9%, up from July’s 2.7%, might give the Fed pause for thought, but after last week’s weaker than expected jobs data - just 22,000 jobs created in August - a cut does seem like the base case.

• Read: Good time to invest in Europe? 3 fund ideas
• Read: 5 stocks to watch in September
• Read: September could be the cruellest month for stocks

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. 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. 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.