Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

THE Fed has provided the New Year fireworks this year. Investors may have started to worry less about Omicron as 2022 gets underway, but they have re-focused on the other key market drivers with a vengeance: inflation, interest rates, earnings and valuations.

The Fed is back in focus

The unveiling of the minutes of Federal Reserve meetings is sometimes a yawn. Not last week. Confirmation that the Fed is determined to get on top of still rising inflation had investors placing bets on a first US rate rise as soon as March. Tech stocks bore the brunt of the new hawkish tone, both the fast-growing but still unprofitable kind and the Silicon Valley titans like Alphabet and Apple which have led the market higher. The Nasdaq index lost 4% in the first five trading days of 2022. Expectations for an earlier turn in the interest rate cycle were given further support by non-farm payroll employment data which saw the unemployment rate dip below 4%, well on its way to matching the pre-pandemic low of 3.5%.

Inflation

This week we will see whether the Fed is right to worry about spiralling prices. There will be inflation data in many of the world’s biggest economies - China, Russia and India included - but all eyes will be on the US number. Expectations are that last month’s 6.8% will be eclipsed, with a 7.1% rise pencilled in for December. That would be the fastest pace of chance since February 1982 when the Federal Reserve was still battling to get on top of the stagflation that made the 1970s such an economic catastrophe.

Inflation-busters

In that environment, and with geo-political tensions rising in Ukraine and Taiwan, investors will be on the lookout for safe havens. One place they haven’t been looking in the past year or so is the gold market where the price of the precious metal has fallen from an August 2020 high of $2,067 to around $1,800. Last year saw outflows from gold ETFs of $9bn, the biggest withdrawal from gold funds since 2013. Gold’s traditional port in the storm status has been hijacked by the new kid on the blockchain, Bitcoin. But it too has fallen out of favour in recent weeks as investors have looked for more defensive plays. Bitcoin peaked at more than $68,000 last autumn but has fallen to around $40,000 today.

Company earnings

This week we will also get the first hint of where the third key driver of markets is heading. As usual, the big US investment banks including Citigroup and JP Morgan Chase will kick off fourth quarter earnings season on Friday. Analysts expect 2022 to see a big drop in earnings growth from more than 40% last year to high single digits this time. That will be enough to keep the bull market running as long as valuations, the final key driver of returns, remain stable after last year’s declines. For more on where markets are heading this year, watch out for our latest quarterly Investment Outlook, published on Wednesday 12th January.

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. 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.

Share this article

Latest articles

Watch: Market News Update - 16 May 2022

In this week’s market update: another down week for shares; bond markets catc…


Tom Stevenson

Tom Stevenson

Fidelity International

Market news today - Contrarians sense a turning point

What’s driving your investments this week?


Tom Stevenson

Tom Stevenson

Fidelity International

How to turn a profit in the post-Covid market

A bigger state and rising inflation means it really may be different this time


Tom Stevenson

Tom Stevenson

Fidelity International