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 tortoise is catching the hare. After a blockbuster pandemic for high growth ‘stay at home’ tech stocks, unfashionable and cheaper ‘value’ shares are having their moment in the sun. This week’s big market question is whether the rotation has legs.

Passing on the market baton

The S&P 500 is down nearly 9% from its recent peak. That’s close to the usual definition of a market ‘correction’. And beneath the surface there have been some more dramatic moves. Previously high-flying tech stocks are in retreat, with a popular ETF that invests in innovative disruptors like Tesla down more than 40% since the start of 2021. By contrast to that Ark Invest ETF, Warren Buffett’s relatively staid Berkshire Hathaway, which prefers out of favour stocks, is up 34% over the same period. Over a two-year horizon, the two investments have taken very different paths to reach a similar point. The tortoise is back in contention.

All eyes on the Fed

You don’t have to look far to see why the growth bubble is deflating. Growth in the future is worth more to investors today if interest rates are low but it’s less attractive when the cost of money (and the opportunity cost of waiting for growth) rises. The Federal Reserve is likely this week to give us a broad hint that its first rate-hike in this cycle will come as soon as its next meeting in the middle of March. Investors are pricing in four US rate hikes this year. Goldman Sachs thinks there might be more. That’s good news for cyclical stocks like banks and commodities. Bad news for Silicon Valley and for other speculative investments like Bitcoin, which at $35,000 is half its recent peak.

Can earnings stop the rot?

The level of the market will be determined by how fast earnings are growing and by how much investors are prepared to pay for those profits. It’s early days yet in the fourth quarter earnings season but expectations are still for a 23% rise in profits in the final three months of 2021. That could put shares back on an even keel but only if valuations hold up. In recent weeks the S&P 500 has drifted from 21 times this year’s expected earnings to just 18. Big names to watch this week are: Microsoft, Tesla and Apple.

When does politics start to matter?

Even the prospect of a new Prime Minister has been shrugged off by the pound. It’s at a two year high against the euro thanks to the Bank of England’s early move on interest rates and, at $1.37, is rising against the dollar too. But investors might look less favourably on sabre rattling in Ukraine. We don’t know if Russia plans to mobilise troops kicking their heels on Ukraine’s border nor what the West’s response would be. On top of monetary policy and earnings concerns, however, it has the potential to unsettle markets further.

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. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. 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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