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.

SPRING is on its way but are we heading back into economic winter? Data and the bond market are flashing red, but the glass is still half full for shares.

What’s the data telling us?

The UK economy ground to a halt in February, even before the impact of the war in Ukraine was felt. Gross domestic Product (GDP) rose by just 0.1% month on month, missing expectations and down from January’s 0.8% improvement. Chip shortages hit car makers, more than offsetting a small rise in services as Covid restrictions were lifted. Storms hit the construction sector. The UK economy is 1.5% bigger than pre-pandemic but the outlook for the next few months is clouded by the cost-of-living crisis. Inflation data mid-week on both sides of the Atlantic will underscore the scale of price rises. In the US, prices are forecast to have risen by 8.4% in March. Here, the consumer price index (CPI) is pencilled in at 6.7%.

But does this mean recession?

Not necessarily. Although inflation is largely a product of rising energy costs, it also reflects a continuing post-pandemic recovery. If we do slip into recession, it will be the result of central banks tightening too hard and fast. The bond market is flagging that risk, with short term rates as high or slightly higher than longer term yields. That’s a classic recession signal. But it doesn’t have to mean an imminent downturn. Deutsche Bank this week said it thought recession towards the end of next year was its base case. Often there’s a long lag between the bond market flashing red and recession actually arriving.

Is that why shares are still riding high?

It’s one reason. Investors are looking through the short-term rise in rates because they think it won’t last. And if interest rates come back towards a neutral rate of around 2.5% within 18 months or so that might be a decent backdrop for shares. The average rise for the S&P 500 after previous bond market recession signals has been 9% over one year and 16% over two. The equity bull market could have a final push still to come. One other reason to think that might happen is the sheer weight of money. Since the financial crisis perhaps six times as much cash has flowed into bond funds than shares. In an inflationary environment that’s likely to reverse.

And what about earnings?

The final piece in the market puzzle is corporate earnings. Although these are being skewed higher by strong energy sector profits, earnings are still looking good. And this week we get the first indications of how the first quarter went. In the run up to the Easter weekend it’s the big US banks, as usual, which get proceedings underway.

Which just leaves China…

Yes, that’s the wild card. Mainland and Hong Kong markets were down sharply as the week started on lockdown concerns. Shanghai remains largely shut.

Don’t forget on Wednesday we will be publishing the latest Investment Outlook which includes a video and podcast where I answer your questions on the market outlook for the weeks ahead.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. 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. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. 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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