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.
No doubt about the main focus this week - Donald Trump is back in the White House and he’s determined to hit the ground running. Expect a flurry of executive orders to curb immigration, threaten the rest of the world with trade tariffs and deregulate sectors close to the hearts of the Maga faithful.
Read: What next for the US? Three fund ideas
Trump 2.0
Donald Trump is only the second US President to have returned to the White House after a period out of power. Non-consecutive terms are almost unprecedented.
Having had four years in power, and another four to plot his return, there’s no doubt that the new President will be quick out of the blocks this week. Some measures require Congressional approval. Others, though, can be implemented by executive order. The President can do what he wants.
Trade tariffs fall in that camp, so everyone expects them to be central to a new era of ‘Art of the Deal’ arm-twisting. If Trump can use the threat of higher levies to force trading partners to do his bidding on migration or drug trafficking, even the future of Greenland or the Panama Canal, then he probably will.
Other moves this week are likely to focus on boosting key US industries like oil and gas. Trump has promised an era of US ‘energy dominance’. He will want to slash red tape, cut restrictions on energy production and reverse Biden era measures like emissions restrictions designed to boost electric vehicle adoption.
How will markets respond?
Markets have been volatile since the New Year as investors try to assess the economic and financial impact of Trump 2.0. Working out how much of the Red Wave has already been priced in is not simple, especially with the US stock market trading close to its all-time high.
Last week saw a pick-up in market sentiment after a couple of weeks when it looked like the post-election euphoria was fading. 61% of stocks are now above their 200-day moving average as the equal-weighted index - a better measure of the broader market than the tech stock dominated S&P 500 - has recovered its poise.
Much will depend on how the fourth quarter earnings season pans out. We’re only 10% of the way into the results round but so far so good, with more than 80% of companies reporting so far beating expectations by a decent margin. Double digit growth looks plausible this year, which it needs to be if valuations stagnate or even fall back a bit. Earnings need to pick up the baton.
Also important is what happens in the bond market. With inflation sticky and the jobs market still robust, there’s little incentive for the Fed to cut rates much further than they already have. Shares will struggle to remain competitive if the return from safe government bonds rises much further.
- Read: Annuity rates in 2025: will UK gilt turmoil boost retirement income?
- Read: 5 lessons from the lockdown stocks that came crashing down
Gilts back on track
After a nasty bout of the Liz Truss wobbles, the UK gilts market actually had its best few days since last summer. Here the spectre of stagflation - sluggish growth and persistent inflation - has pushed longer-term bond yields up to high levels, at least by the low standards of the 17 years since the financial crisis.
A string of weak UK economic data, however, saw the 10-year government bond yield retreat last week from its high of nearly 5%. Investors now think that at least two quarter point rate cuts are likely from the Bank of England this year as it bids to support the UK economy. At 4.66% the 10-year yield is still well above last September’s 3.75%, but it has at least stabilised. Yields move in the opposite direction to prices so the fall in yield has boosted the value of bonds.
The expectation of lower interest rates (and a Federal Reserve sitting on its hands) has pushed the pound well down against the dollar. It has fallen from $1.34 last autumn to about $1.22 today. That’s bad news for holidaymakers, but good news for exporters and overseas earners. And that has given the FTSE 100 a boost to a new all-time high above 8,500.
Read: Bond yields spike: the pros and cons
Watch our latest podcast: What your money habits say about your psychology
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. 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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