Market Commentary 2016: Quarter 1 June 2016

Market Commentary 2016: Quarter 1

The UK economy continues to perform relatively well, with the Bank of England revising its estimate for 2015 growth up from 2.2% to 2.3% in the first quarter (Q1). Inflation also rose slightly, from 0.3% to 0.5%. However, productivity data showed its biggest decline since 2008.

Meanwhile, the looming vote on Britain’s membership of the European Union, scheduled for 23 June, is beginning to cause nervousness among producers. The referendum result will have a significant long-term impact on UK companies and the UK economy.

In the euro area, economic confidence dropped in March, but lending grew at its fastest rate since 2011 in February and inflation was revised up to 0% in March, from a previously deflationary figure of -0.2%.

Elsewhere, the US economy posted growth of 2.3% year-on-year in the fourth quarter of 2015, with most analysts expecting expansion to continue around this healthy level in the coming months. Following the first interest rate increase in nearly ten years in Q4, and with inflation sitting above target at 2.2%, markets are watching the Federal Reserve for signs of further rate hikes.

First-quarter growth in China was in line with expectations at 6.8% year-on-year. March data suggests that recent monetary and fiscal stimulus measures are helping to boost the economy, with retail sales, and electricity output data improving.

KEY TAKEAWAY

What should investors do in response to these developments?

Many investors change their portfolios in a bid to take advantage of the latest news. However, it’s very difficult to time these changes effectively, especially when market volatility rises as it has done lately.

In practice, shifting your portfolio in response to short-term events may lead to little more than increased trading costs.  In many cases there is not even a clear link between economic news and market performance. For example, the UK stock market struggled in Q1 despite an upward revision to 2015 growth.

This simple fact illustrates the importance of staying disciplined rather than reacting to any short-term developments.

Market commentary provided by Vanguard – Quarter 1 2016

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