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.

IS the stock market correction running out of steam? Last Friday’s rally in share prices provided welcome relief at the end of a sixth consecutive week of market declines. There’s still plenty to worry about, but contrarians’ antennae are starting to twitch.

The rollercoaster continues

Another wild ride for shares last week saw a dramatic recovery on Friday but it wasn’t enough to prevent the S&P 500 coming within a whisker of the traditional definition of a bear market - a 20% decline. The run of weekly declines is now the worst since the financial crisis in 2008.

The reset has so far largely been about falling valuations. US shares now trade on around 16.5 times expected earnings. That compares with nearly 23 a year ago. Other markets, such as the UK’s, are even cheaper, barely into double digits as a multiple of profits.

So, has the correction run its course? That depends to a large extent on whether earnings can keep rising. Europe has led the way in the latest first quarter reporting season, with a 40% rise fuelled in large part by much better-than-expected energy profits. In the US, earnings are still expected to rise by about 11% this year.

What’s getting investors interested?

As well as falling valuations and still rising earnings, a few other contrarian measures are flashing green this week. Sentiment, as measured by the ratio of investors calling themselves bullish or bearish, has not been this weak since the financial crisis. Fund flows into funds and ETFs are also negative after two years of inflows. And investors are no longer borrowing to invest as they did in 2020. All of these suggest that things may have got so bad they are starting to look good.

The wall of worry

For that to be the case, however, investors will need to navigate a continuing torrent of worrying economic news. This week started with an 11% fall in Chinese retail sales, bad news for a country looking to shift away from a reliance on exports. And here in the UK, the big focus will be on inflation, with a new cyclical high of 9% pencilled in as rising energy costs start to kick in.

What about other assets?

It’s not just about shares. Sentiment among bond investors has also taken a turn for the worse in the past week or so. In particular, corporate bonds have started to reflect investor concerns. The gap between the yield on safe government bonds and those issued by riskier companies has widened sharply.

Meanwhile, crypto currencies such as bitcoin have taken another beating. The price of bitcoin fell as low as $25,000 last week before bouncing back to end the week at $30,000. That’s still less than half the recent high, showing that early hopes that bitcoin might be a useful hedge against inflation were wide of the mark. Crypto looks more like just another highly speculative and volatile asset class.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Please be aware that past performance is not a reliable guide indicator of future returns. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. 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. 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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