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 doesn’t matter which way you look at it, the US stock market has enjoyed a stellar run during Joe Biden’s first year in office. The S&P 500, Nasdaq and Dow Jones Industrials have all made new record highs in the past month, as they have many times previously over the past year1.

This broad base of success transcends the “FAANGS” – the new economy stocks leading the world to a faster, more efficient, more technologically advanced future. Even the dull old Dow – with its clutch of industrial constituents – has joined the party.

However, most investors would agree this miracle of constantly rising share prices can’t last forever. The list of potential culprits for bringing markets back down to earth is growing.

Rising consumer price inflation leading to higher interest rates; supply chain bottlenecks; labour shortages; and continuing outbreaks of Covid-19 all suggest the going could get a whole lot tougher from here.

History suggests a stock market crash happens not only when investors are least expecting one, but also when a rare combination of factors conspire to weaken the outlook – rising interest rates; overvalued assets; the onset of a recession, for example.

Interest rates are very likely going to rise. However, it’s highly unlikely we shall see them at the kinds of levels that have helped spark previous market crashes. In part, that’s because some of the price rises we are seeing today are down to factors that higher rates can’t fix – like broken supply chains.

The valuation question is less clear-cut, with the S&P 500 trading on a fairly demanding 22 times the earnings US companies are expected to make over the next year2.

Moreover, with earnings growth expected to slow in 2022, we could see more fear, uncertainty and doubt (“FUD”, the opposite of “FOMO”) creeping into markets.

Before we give up the ghost, however, it’s also worth remembering the main reasons why US shares have been rising so fast and for so long: High levels of investor confidence in the economic recovery coupled with very low returns from other assets such as bonds and cash.

Secondly, there’s the “Biden boom” which, in itself, could end up being every bit as extraordinary as the recent progress of the stock market. On Monday, Biden signed a bill that will inject an extra US$550 billion into the country’s roads, trains, EV charging networks, and more. A follow-up US$1.85 trillion social spending bill is due anytime.

Finally, there’s the relative value of bonds versus shares to think about. Currently, relative value favours shares. An earnings yield of 3.7% for the stock market is more than twice the 1.6 yield available from benchmark 10-year government bonds3.

That’s a big difference in favour of shares, which takes no account of the greater value that is created by investing in the stock market over the longer term. It’s a significant anomaly that suggests – even if we do see some more volatility in 2022 – the next market crash remains some way off.


1, 02.11.21
2 MSCI, 29.10.21
3 MSCI, 29.10.21, and US Department of the Treasury, 18.11.21

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. 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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