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.

IT’S Thanksgiving on Thursday, a good time to be grateful for the 118% return the US stock market has delivered since the S&P 500’s low point in March 2020.

The bull market in context

The remarkable performance of shares since the start of the pandemic is a stand-out rally of historic proportions. Only the recovery from the 1929 crash (an 89% peak to trough fall, let’s not forget) can better the pace and strength of the current bounce back. Many people are reprising Alan Greenspan’s comments about ‘irrational exuberance’ from the mid-1990s but others point out that the sharp rise in corporate earnings over the last 18 months justifies the surge. At $189, average earnings for America’s biggest companies are well ahead of the $163 pre-pandemic peak, and put shares at the S&P’s current 4,700 on 25 times earnings. That’s high but not top of the market excessive.

The great inflation debate

The key question for investors is whether the markets are too complacent about both inflation and the likely central bank response to it. Richard Clarida, the Fed’s number two, warned this week that the pace at which bond purchases are due to be tapered down this year and next will be on the agenda at next month’s rate-setting meeting. A faster taper opens the door to earlier rate hikes. But investors don’t believe it. The 10-year Treasury bond yields just 1.5% at a time that consumer prices are rising at more than 6%. That puts investors firmly on the side of ‘team transitory’ and hopes for a rapid retreat from today’s worrying inflation prints.

The 40-year fix

If you wanted evidence that interest rates will stay lower for longer then look no further than British lender Kensington Mortgages, which is set to launch a new 40 year fixed-price home loan, the first of its kind in the UK. If you’ve got 40% equity, you’ll be able to lock in a 3.34% interest rate with better terms for shorter periods. That suggests that we may well be locked into a cheap money world for the foreseeable future. With debts at historic highs compared to economic output, maybe no-one can afford for rates to rise much from here.

Cracks in the everything rally

Fear of missing out, aka FOMO, may be pushing the prices of many investments higher - bank stocks are up 30% since the start of the year on interest rate hopes and booming M&A activity - but the gains are not across the board. The hot crypto market has cooled a bit this week. Two weeks ago, Bitcoin fetched $67,000; today it’s changing hands for $57,000. Meanwhile, the Covid surge and better supply have taken the edge off the oil price. Investors have responded to lockdown fears in Europe by pushing the price of Brent crude back below $80 a barrel, although that still compares with less than $50 a year ago.

Five year performance

(%) As at 19 Nov

2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
S&P 500 11.8 8.6 17.0 13.7 30.2

Past performance is not a reliable indicator of future returns

Source: FE, total returns in GBP as at 19.11.21

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 a Fidelity adviser or an authorised financial adviser of your choice.

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