This week in the markets: Spring is in the air

Spring is in the air. The gardens are bursting into life and so too are financial markets. Growth is strong, earnings are rising, inflation looks to be under control and interest rates are set to drop. It doesn’t get much better for investors.

Correction, what correction?

The April wobble has disappeared as quickly as it arrived. The US stock market, down around 6% at its worst, is back in record territory. That’s typical of a cyclical bull market, in which investors want to see the glass as half full and look for reasons to buy.

The equal-weighted index is not quite back to its peak level but it’s on its way and 80% of shares are trading above their 200-day moving average, a key measure of momentum. And smaller companies are joining in too. The Russell 2000 index has broken out of its multi-year sideways channel. And on just 15 times earnings, the small caps don’t suffer from the main objection to the US market - that it is too expensive.

Other equity markets are picking up on the good news too. Emerging markets, in particular, are enjoying the prospect of lower US interest rates and a weaker dollar. Strip out China, which remains in the doldrums despite the weekend’s property sector stimulus, and the rest of the developing world is back to its 2021 peak. India is the main focus, and many people believe the baton is being passed from China. India’s economy is growing fast and it doesn’t suffer from China’s demographic and capital misallocation headwinds. The politics are less tricky too.

Real assets, the real deal

Another reason, emerging markets are in favour is their exposure to commodity prices, which are on a tear. The most important industrial metal, copper, looks to be on the brink of a new supercycle. It’s a beneficiary of a strong economy but there are longer-term reasons to think its price is headed higher too. It is a key component in the shift to a net zero future. Much of the clean energy and electric vehicle infrastructure that needs to be built is extremely copper-intensive. And supply is inadequate after years of underinvestment.

At the same time oil is on the up, boosted this week by the death of Iranian president Ebrahim Raisi in a helicopter accident. Oil is a barometer of uncertainty in the Middle East. And precious metals, too, are running hot. Gold is at an all-time high, but silver is where the real interest lies at the moment. Like gold, it’s a hedge against inflation but it also has industrial uses and it’s another key component in the clean energy push. Silver is up 30% year to date, easily outperforming gold.

Inflation in focus

Looking ahead to this week’s announcements, the main focus here will be Wednesday’s inflation print in the UK. Hard to believe, just 18 months on from the 11% inflation peak, but it looks like the rate of price rises could fall back to 2.1%, within reach of the Bank of England’s long-term 2% target. Some are even talking of a snap election to capitalise on the good news.

The main reason is a 12% fall in Ofgem’s household energy cap after a rapid fall in wholesale gas prices. And that’s a reason to be cautious. Wage growth threatens stickier service sector inflation and it is possible that prices pick up momentum again later in the year. The Bank will be looking hard beneath the surface of this week’s data to see what the underlying picture is.

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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. Please be aware that past performance is not a reliable guide indicator of future returns. 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.