This week in the markets: the bull market remains intact

A third of the way through 2024 and investors are still being rewarded for taking risks. Shares are outperforming defensive assets like bonds as the economy remains strong and hopes for lower interest rates are pushed further into the future.

The scores on the doors

After four months of 2024, shares have held onto their early lead. The S&P 500 has come off its March high but remains 6% up year to date. The size effect is still in evidence because smaller companies are marginally down as of the end of April. But that is still better than the performance of interest-rate-sensitive investments like government bonds and real estate investment trusts (REITs) which are underwater to the tune of 9.2% and 7.4% respectively.

Shares are holding onto most of their gains since the October 2022 low - up nearly 50% since then. But they are not the best performers. Top of the leader board are bitcoin and gold in a curious combination of outperformance by one out-and-out risk asset and one safe haven. The two rising together smacks of momentum chasing, with investors buying what’s going up.

For now, the glass remains half full for equity investors. They are enjoying the Goldilocks scenario of a still robust jobs market but cooling inflation. The soft-landing narrative is still the central case for many investors. Last week’s non-farm payroll jobs report pointed in that direction - fewer new jobs than expected but still positive growth. The net result for investors is that recent fears that interest rates might actually be headed higher again look wide of the mark.

UK in focus

In a shortened week after the May Day Bank Holiday, it’s our domestic economy that’s in the spotlight again. Today’s house price data have set the tone, with a modest 0.1% rise in prices showing how higher for longer interest rates are starting to hurt homeowners. In recent weeks a string of big lenders have raised their fixed rate mortgages, which is bad news for the thousands of people seeing their pandemic-era cheap loans come to an end, to be replaced by more onerous funding costs.

That is likely to spill over into the rest of the economy, with GDP data on Friday likely to underline the fragility of UK growth. Before then the Bank of England will have the chance to set out its thinking about interest rates and the likely timing of the first cut from today’s multi-year high of 5.25%. Although the Bank of England is expected to be quicker out of the blocks than the Fed with the first cut to the cost of borrowing, it’s unlikely that there will be any change this week.

The mighty dollar

The relative differences in monetary policy on either side of the Atlantic are starting to show up in the currency market where the pound has fallen from a recent high of over $1.30 to around $1.25. That’s actually helped the London stock market, where dollar earnings are a key feature. On translation back into sterling these are worth more as the pound falls.

The weakness of our currency is nothing compared to what’s happening in Japan, where it now costs 160 yen to buy a US dollar. That’s the lowest exchange rate in over 30 years. While good for the Nikkei 225 index (similar story to the UK, although more to do with exporters than overseas earners), the pain is being felt in Japanese pockets as imports become more expensive and overseas holidays to places like Hawaii become unaffordable. The government is concerned and last week intervened to sell dollar assets in a bid to stabilise the yen.

Earnings season - still on track

Meanwhile, the most important driver of share prices - corporate earnings - looks secure. With around 400 of the US’s biggest companies having now reported on first quarter profits, about 80% of these have beaten expectations. And they have done so comfortably, by nearly 9%.

That means that full calendar year expectations of 9% earnings growth look realistic. Which should keep a lid on the market’s valuation multiple of just over 20 times expected profits. The cyclical bull market which has seen shares rise by nearly 50% in 19 months looks to be intact.

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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.