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.

THERE were no red roses from Mr Market this Valentine’s Day. The threat of war on Europe’s eastern fringe and fears of an early start to the Fed’s proposed rate hikes had investors scrabbling around for that loving feeling at the start of the half-term week.

Ukraine

Talks continue for now, but speculation is mounting that a Russian invasion of Ukraine is imminent. The main focus for financial markets is the likelihood of further economic sanctions on Russia, with a potentially significant impact on energy, food and metals prices. All of these are already rising so the Ukraine situation, as well as being a potential humanitarian disaster, threatens to deepen the ongoing inflationary crisis. Investors are heading to safe havens. The cost of a barrel of oil is close to $100 again. Safe government bonds are back in favour. Even gold, which has failed to live up to its port in a storm reputation, is edging higher. Shares, which have largely viewed Ukraine as a local difficulty, finally capitulated as the week began, with heavy falls across Asia and Europe.

Where next for the Fed?

For investors, the greater concern remains what the Federal Reserve has in mind. Last week’s red-hot US inflation reading of 7.5% year on year set the interest rate hares running. Having expected only a few months ago that there would be just one or two US rate hikes in 2022, the prospect of seven (one at each rate-setting meeting this year) now looks well within the bounds of possibility. Speculation at the weekend was that the first hike might be 50 basis points (half a percentage point) rather than the usual opening salvo of a quarter point rise. There is even talk of the Fed moving before its March meeting. It hasn’t moved out of cycle in this way since 1994. An early hike would certainly spook investors even if the futures markets still think that rates will peak at little higher than 2%.

Two years on, what have we learned?

Between February 21st 2020 and March 23rd that year, the stock market fell by a third as Covid arrived from China and economies were effectively shut down to contain the virus. Since then, the US market has doubled. Even the underperforming UK market has regained its pre-pandemic level. Look at a five-year chart of any market and it’s tempting to ask: Pandemic, what pandemic? Hindsight is a wonderful thing, and few were brave enough to jump back in immediately after the pandemic plunge. But the last two years have shown once again that the best time to be bullish is when the outlook is most uncertain. More recently, we’ve also learned the importance of diversification. Since the start of the year, the FTSE 100 has risen 4% while the S&P 500 has fallen by 7%. A big weighting to commodities and banks has kept the UK on track.

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.

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