December 2013 Update
The timing of US tapering dominates market activity
The main issue facing bond and equity markets alike remains the timing of the US Federal Reserve’s (or Fed’s) decision to start “tapering” its programme of monetary stimulus.
Through a series of asset purchases, the Fed’s programme has been helping to stimulate the world’s largest economy, and every piece of economic data is now being minutely examined to assess its significance for the timing of the tapering.
Any good news, such as strong employment data, is taken as a sign that the stimulus will be withdrawn. Accordingly, markets fall. Bad news, like an ailing housing market, suggests that quantitative easing could continue, and therefore markets rise.
The UK stock market gave back recent gains during November, as concerns over the US tapering outweighed a series of positive economic data announcements. Oil majors, a large proportion of the FTSE 100, weighed down the index. Industrial metals and tobacco were also down. Overall, the FTSE 100 fell 1.2% during November.
Overseas markets performed better. This month, the focus fell on a much better-than-expected US jobs report, and for once US investors reacted positively. According to the US Labor Department, the country added 204,000 jobs to its economy in October, a figure considerably higher than the 120,000 expected by analysts.
Instead, market participants took reassurance from Janet Yellen, the soon-to-be-head of the Federal Reserve. She commented that the US jobs market and its wider economy are both performing “far short of their potential”. At a hearing before the Senate Banking Committee, Ms Yellen was also keen to stress that US monetary policy is “not on a set course”.
Investors interpreted this as a signal that stimulus measures will remain in place for the time being. US equities surged on the news, reaching a series of record highs (the S&P 500 index finished above the 1,800 level for the first time ever) before closing for the Thanksgiving holiday.
European equities, meanwhile, were boosted by improving economic data and a surprise interest-rate cut. Although the cut itself was anticipated, many market participants had expected the cut to occur in December. The Bank cited falling inflation – the CPI rate dropped to 0.7% in October, its lowest in three and a half years – and sluggish growth for its decision.
Bond markets suffered from fears that “tapering’ is drawing closer. In the UK, encouraging economic news and speculation that interest rates could rise sooner than expected further added to the negative sentiment towards bonds.
Should I make any changes to my investments?
Everyone’s circumstances are different and we aren’t able to give you advice on what is appropriate for you. As always, if you are considering your own position, you should remember why you invested in the first place and consider the lifespan of your investments. Most importantly, you should seek financial advice before making any changes to your investments.
One way in which you can help reduce the impact of any market volatility is to spread your investments across different asset classes and regions. For more information about investing across different asset classes, take a look at our An introduction to diversification in multi-asset funds guide.
Remember that before making any changes to your investments, you should seek financial advice. If you don’t have a financial adviser, you can find one local to you by visiting find a financial adviser, which is responsible for promoting financial advice in the UK.
Investment markets and conditions can change rapidly and, as such, the views expressed in this Update should not be taken as statements of fact nor be relied on when making investment decisions. Forecasts are opinions only, can not be guaranteed and should not be relied on when making investment decisions.