Volatility returns

‘Goodbye Goldilocks’ is how it’s been described to me. Certainly, the chart here of the S&P 500 index over the past six months looks like a game of two halves. The story of 2017 was an almost unnatural calm - the market just moved serenely ahead, boosted by robust growth, stable interest rates and an absence of inflation. The arrival at the Fed of Jay Powell and the publication of a worryingly strong wage growth figure in early February was enough to trigger fears of a watershed moment - the end of the dovish Yellen era and the start of a harsher climate of tighter policy. Markets like to test new Fed chairs and this was certainly a baptism of fire for Mr Powell. He handled it well and the latest non-farm payrolls, showing strong growth and a weakening of wage pressures, suggest that the demise of Goldilocks may have been exaggerated.

Source: Thomson Reuters Datastream, as at 15.3.18

Past performance is not a reliable indicator of future returns.

The end of the bond bull?

People have been calling the end of the bond bull market for as long as I can remember. So far, they have been wrong, but no-one rings a bell at the bottom (or the top) of a market cycle. Perhaps we are already some way into a bear phase for bonds. That is the call by some of the biggest names in fixed income. Bill Gross, the ‘King of Bonds’, tweeted recently that the 25-year bull market was over. Certainly, as the chart here shows, bond yields and inflation expectations have been on the rise since the election of Donald Trump. His fiscal stimulus plans threaten to pour fuel on an already smouldering economic fire and his America First trade policy will surely push costs higher for much of US industry. Interesting, though, that the 10-year Treasury yield has so far refused to push through 3%. There are plenty of buyers at this level. Maybe there’s life in the old bull yet.

Source: Thomson Reuters Datastream, as at 15.3.18

Past performance is not a reliable indicator of future returns.

1999 revisited?

The chart here will look familiar to those who lived through the dot.com boom and bust. This is the share price chart of Netflix over the past five years. It shows how an interesting investment story was initially treated with scepticism, then broadly accepted before finally turning into an article of blind faith. It is the typical trajectory of an investment bubble. Netflix is the poster child of technological disruption. Huge investment has led to rapid growth in subscribers and sent rivals scurrying to catch up. The trouble is no-one can yet be sure that all the money poured into producing hit series like The Crown will deliver a return to justify the explosive share price performance. It might, but when a share price chart turns left and heads almost vertically up the page like this, investors need to tread very carefully indeed. Memories are short in the markets but we have been here many times before.

Source: Thomson Reuters Datastream, as at 15.3.18

Past performance is not a reliable indicator of what might happen in the future. When investing in overseas markets, changes in currency exchange rates may affect the value of an investment. Reference to specific securities or funds should not be construed as a recommendation to buy or sell these securities or funds and is included for the purposes of illustration only. For full 5 year performance figures please see Market data.

Acknowledgements
I would like to thank the many knowledgeable and experienced people within the wider Fidelity organisation who have helped me develop the ideas in this Investment Outlook. Although the views expressed here do not represent the shared opinion, or house view, of Fidelity’s investment team, the combined expertise of over 380 investment professionals in 13 countries is a very significant resource on which I have been able to lean. In particular, I would like to thank James Bateman, chief investment officer for multi-asset investing, Sonia Laud, head of equities, Marty Dropkin, head of fixed income research, Gary Monaghan, investment director in Hong Kong, Jeremy Osborne, investment director in Tokyo, Matthew Jennings, investment director for UK equity, Leigh Himsworth, UK portfolio manager, Toby Gibb, investment director for European equity, Neil Cable, head of Real Estate, Curtis Evans, head of investment directing, European Fixed Income.

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