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.

IT’S being called the FOMO rally. The Fear of Missing Out is driving markets to new records. But how sustainable is it?

Bubble watch

There’s no worse feeling for an investor than being on the sidelines while others are making big profits. The fear of being left behind is what fuels the final stages of a bull market, causing shares to overshoot. With markets almost twice their level at the pandemic low last March and Wall Street enjoying its longest run of record highs since the 1960s, there’s lots of talk of FOMO right now.

Twenty years ago, during the bubble, we learned that the last few months of a bull market are the most profitable but also the riskiest. No-one gets out at the top; equally, no-one knows when the bull market will end. Artificially low interest rates, a tolerance of moderately higher inflation and more government spending could keep markets bubbling higher.

Earnings peak but dividends bounce back

A key driver will be the earnings cycle. Profits growth in the third quarter results season just finishing will most likely hit 40%. That’s better than the 28% expected at the start of the earnings round but not as good as the extraordinary growth reported in the first two quarters of 2021.

Higher earnings have fuelled a quicker than expected recovery in dividends. That’s a key support for the stock market in a low interest rate environment. Janus Henderson calculates that dividends are now just 2% below their pre-pandemic peak. They will exceed that by the end of the year. The miners are a key contributor, on the back of higher metals prices. Banks, too, have benefited from the ending of restrictions on shareholder payouts and buoyant markets.

Inflation remains in focus

Last week attention was on US consumer prices, rising at 6.2%, the fastest rate since 1990. Over here the latest monthly print on Wednesday will confirm that inflation is back on the radar and looking less and less ‘transitory’. Prices are expected to be 3.9% higher year on year in October, up from 3.1% in September.

The bad news is that this is almost certainly not the end of it. The Bank of England expects inflation to peak in the spring at around 5%. Then the impact of oil and gas price hikes should fade. The 1970s remains the concern. Price rises were at this level in the late 1960s before taking off with a vengeance in the following decade.

Moving on from COP26

Markets have largely ignored the Glasgow climate summit, even if in the long run global heating may turn out to be the dominant influence on asset prices. After plenty of ‘last chance saloon’ hype in the run up to COP26, most observers have concluded that, while there was some progress, there’s still a lot of work to do if the goals set in Paris in 2015 are to be achieved.

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. 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 a Fidelity adviser or an authorised financial adviser of your choice.

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