Market Commentary: Quarter 4 2017 February 2018

Market Commentary: Quarter 4 2017

UK economic performance maintained its sluggish momentum in the fourth quarter, with stronger growth in manufacturing helping to offset the slowdown in the consumer services sector. Despite slow economic growth, the UK unemployment rate remains at a 42-year low of 4.3%. This prompted the Bank of England to raise interest rates in November for the first time in ten years, from 0.25% to 0.5%.

Brexit negotiations reached a small milestone when Brussels agreed to move on to the second phase of talks. However, Theresa May’s Brexit plans were upset when Parliament won a key vote to have the final say on any exit agreement the government reaches with the European Union.

The euro area continued to perform strongly in the fourth quarter, benefiting from reduced political uncertainty and high levels of business and consumer confidence. As a result, the ECB announced that a widely expected tapering of quantitative easing would begin in January, stressing future rate hikes would be a distant prospect.

US activity firmed in the final quarter of 2017, with consumption growth rebounding, marked manufacturing improvements and broader price measures trending upwards. The Republicans’ tax reform bill, which includes income and corporate tax cuts, was signed into law. The Federal Reserve announced an anticipated rate hike, with the target range for the Fed funds rate now between 1.25% and 1.5%, in conjunction with an upward revision to their 2018 GDP growth forecast.

In Japan and China, economic activity slowed in the fourth quarter but remained strong nonetheless. Victory for Prime Minister Abe in the snap election confirmed Japan would be kept on the same track it has been on since 2012, pursuing fiscal tightening, loose monetary policy and tentative structural reform.

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.

In practice, shifting your portfolio in response to short-term events may lead to little more than increased trading costs.

Market commentary provided by Vanguard – Quarter 4 2017

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