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.

Lockdowns are lifting, economic activity is rising, hugging is happening. There’s plenty of good news here in the UK - so why is the market suddenly getting the jitters?

Markets are unpredictable beasts. To understand what they’re making of the economic recovery, it pays to home in on exactly what has happened to test their nerves.

Yesterday we learned that UK consumer spending rose above pre-pandemic levels in April for the first time since the pandemic struck.

We also saw that UK house prices have risen at their fastest rate in 15 years, with the monthly Halifax House Price Index reporting a 1.4% increase in prices over April.

That’s not all. The Bank of England last week upgraded its growth forecast for the UK economy to 7.25% this year, its fastest rate since just after the second world war. Three months ago, it was predicting growth of 5%.

Positive signs from March’s retail sales data - up 5.4% from February - and April’s GfK Consumer Confidence index data - which showed that consumer confidence had reached its highest level for 13 months - paint a similar picture.

Things should improve further still. Tomorrow’s UK Gross Domestic Product (GDP) data are likely to affirm a strong quarterly rate of growth. The Prime Minister’s confirmation yesterday that restrictions will ease further from next week spells good news for retail and leisure industries. Scotland too is due to announce easing measures today.

Now faced with opportunities to spend, many consumers are also finding they have the means. It’s estimated that UK households have saved around £180 billion of “accidental savings” over the course of the pandemic. Evidence so far suggests people will feel little hesitation in releasing 13 months’ worth of pent-up demand.

By most indications, the economic recovery is here, and it’s outpacing expectations. Yet still the market’s reaction is mixed.

In a strange way, investors have become dependent on bad news. Since the pandemic struck, lockdowns and restrictions have supported the valuations of the stay-at-home growth stock winners, and ensured an extreme flow of stimulus that has buoyed markets since their April nadirs. Over the first six months of the pandemic, the rate at which the economic news worsened was matched only by the recovery in stock prices. Massive stimulus packages, ultra-low interest rates, extreme price volatility and accruing savings stirred a perfect investor storm.

The paradox was recently exemplified in the States. You might expect last week’s dismal employment data to worry investors. Instead, US stock markets hit record highs. It’s their view that bad economic news is fast becoming good news for the prospects of continued ultra-loose monetary policy.

Conversely, a rebounding economy introduces the threat of tightening policy. In China, where the government has already made efforts to rein in stimulus, equities have fallen since March.

With too much good news also comes the threat of inflation. Again, China, which is well ahead of us in its recovery, is starting to exhibit warning signs. While consumer price inflation grew only 0.9% in April, factory gate prices are rising much faster. Producer price inflation jumped 6.8%, the fastest pace of growth since 2017. In the US, where stimulus measures have been far more exuberant than even our own, consumer prices rose in March by 0.6% compared with the previous month, the fastest rise since 2012.

None of this is to say that markets aren’t stopping to enjoy the moment. As we’ve seen, US stock markets are knocking around their all-time peaks, while our own FTSE 100 also strayed above 7,000 last month for the first time since the pandemic struck.

Still, nerves abound. A global selloff this morning has pushed the FTSE down more than 2% at time of writing (and below 7,000). That’s been prompted by sharp falls in US technology stocks, which investors fear would fare particularly poorly in a more inflationary, higher rate environment. Sharply rising commodities prices - iron ore and copper both hit record highs this week - are also a factor, given that commodity prices are usually tied to inflation.

Investors, and economists, find themselves in a delicate position. Inflation can be a good thing - that’s why the Bank of England sets its 2% target - but too much would spell trouble for investors. Something in the goldilocks bracket - not too much, not too little - would be just right.

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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