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.

HOW often does it happen this way? Just when you think that the markets are locked into a rising trend, investors get cold feet and shares stop for a rethink.

Reality check

July was the fifth month on the trot of rising shares prices, the longest run for two years. But, as so often happens, no sooner did investors notice that a bull market had crept up on them than prices paused for breath.

Shares went backwards on four out of five days last week, with the S&P 500 losing 2.3% and the Nasdaq off 2.8%, albeit both are well ahead for the year as a whole. The reassessment came on the back of slightly weaker than expected employment data, which suggest that a soft landing for the economy is now the most likely outcome.

That is both good and bad news for investors. Good because a recession looks less likely. Bad because it probably means that interest rates will normalise at a higher level than we have got used to in recent years.

Bond yields have risen in anticipation of this, boosted further by news from the US government that it is planning to issue more bonds than it thought to plug the gap between tax revenues and government spending.

Changing market arithmetic

Put all this good and bad news together and it argues for a pause in the expansion of valuation multiples for the stock market. At 20 times expected earnings for the S&P 500, the valuation reset is now probably over and rising profits will have to pick up the baton if the market is to hold onto this year’s gains.

Half-way through the second quarter results season, it’s so far so good, but we’re still likely to see a 7% decline in earnings for the quarter as a whole. Last week’s big tech results were a mixed bag with Amazon doing a bit better than hoped but Apple unveiling slower iPhone and other hardware sales.

It’s symptomatic of a market that is unsure where it goes next. The days of ‘there is no alternative’ - with shares the only game in town - look to be long gone. Investors can now sensibly consider a broad range of assets in a balanced portfolio and that means they are likely to be less forgiving of apparently high equity valuations than in the past.

In other news

Elsewhere, it’s the usual mixture of inflation and growth data grabbing the headlines this week. Here in the UK, falling house prices (both the Halifax and Nationwide have now confirmed this) and stagnant GDP growth (more on this on Friday) paint a gloomy picture. Last week’s interest rate hike will surely be one of the last in this cycle.

The inflation focus this week is in the US, where price rises have moderated nicely while remaining above target, and in China, where the authorities are battling with a different problem. Beijing’s challenge is to avert deflation as the post-Covid rally stalls. We should expect more stimulus - the opposite of the ongoing tightening stance in the rest of the world.

Normally, this backdrop would argue for weaker commodity prices. But both wheat and oil are on the up this week as Ukrainian drone attacks on Russian naval targets point to an intensification of the war. Oil stands at a four-month high, with Brent crude at $87 a barrel.

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. 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. 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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