Week Watch - 24/09

Stock Take

Investors began the week digesting news of a second assassination attempt on Donald Trump, but otherwise all eyes were looking towards the US Federal Reserve and whether it would cut interest rates for the first time in more than four years. In the run-up to Wednesday’s announcement, market bets implied a more than 60% chance of a half point interest rate cut.

Countering those bets was news that US retail sales unexpectedly rose in August on the back of strong online purchasing. July’s figures were also better than initially thought. Combined with a rebound in manufacturing production, and unemployment levels at historic lows, the figures suggested the US economy was still ticking along nicely, dampening the case for more aggressive easing.

But the Fed decided otherwise, suggesting it is concerned about the prospect of a weakening economy, and announced a supersized half-point cut in borrowing costs. The last time it cut by more than a quarter point was in 2020 when Covid-19 was ripping through the global economy.

Chair Jerome Powell expressed confidence in the US economy, saying that he saw no sign of recession and citing solid growth, lower inflation, and a solid labour market. Markets are now fully pricing in another cut of at least 25 basis points at the Fed’s next meeting in November.

Optimism about a soft landing for the US economy saw global stocks jump in the aftermath of the announcement. The MSCI World index closed at a record high on Thursday and was joined by the S&P 500, with new benchmarks hit in Australia and Indonesia. The latter had moved before the Fed to cut interest rates by a quarter point. Lower US rates should give other emerging markets the leeway to cut their rates to support growth.

So, what might the Fed’s move mean for investors? A raft of geopolitical and other risks could yet throw markets off track, but an important takeaway is that monetary policy easing cycles (rate cuts) are broadly favourable for equities, particularly in a non-recessionary period. Data going back to 1970 shows that, when there is no accompanying recession, the S&P 500 has averaged an 18% gain in the year following a first rate cut by the Fed. Time will tell, but such uncertainty underlines the importance of maintaining a diversified investment approach that can capture the potential of global economies and markets at various stages in the cycle.

The Bank of England and Bank of Japan were among other central banks making interest rate decisions last week. Before the BoE’s announcement came news that UK inflation held steady in the year to August at 2.2%, despite a pickup in price growth in the services sector. The figures boosted the view that the BoE would keep rates unchanged.

That view proved correct as the Bank’s Monetary Policy Committee voted 8-1 to keep rates on hold. Striking a more cautious tone about cooling inflation than his Fed counterpart, Governor Andrew Bailey suggested the BoE should be able to cut rates gradually in the months ahead, but said it expected inflation to rise to around 2.5% by the end of the year.

But the challenges to the UK economy remain. Following the BoE announcement came news that government borrowing in August rose to its highest monthly level since the pandemic in 2021. The increased borrowing saw national debt rise to 100% of the UK annual economic output – a level last seen in the 1960s. The news added to the pressure on the government ahead of October’s Budget, which Prime Minister Keir Starmer has already warned will be “painful”.

A survey published on Friday suggested those gloomy warnings and the likely need for tax increases are behind a plunge in UK consumer confidence this month, which has dropped to a six-month low. There was more positive news on retail sales, but the new government’s economic growth ambitions are undoubtedly under pressure already.

The Bank of Japan also held rates steady at the end of the week, but provided a more upbeat assessment on private consumption, signalling its confidence that an economic recovery was on track and would allow it to raise interest rates again in the coming months. Those expectations were heightened on news that core consumer inflation accelerated for the fourth straight month in August.

Asian stocks extended their rally on the news, although China was an outlier, as it unexpectedly left benchmark lending rates unchanged despite the raft of weak economic data. However, investors continue to believe that further stimulus is on the way. The Fed’s move should provide more scope for Beijing to ease policy without over-pressuring its currency.

? S&P Dow Jones LLC 2024. All rights reserved.

Wealth Check

Financially, it’s been a difficult few years for households, across all income brackets. As a result, many families focused down on day-to-day costs, at the expense of longer-term investing and pension saving. Now, the government is widely reported to have its sights on raising certain taxes too, particularly those that protect personal assets and affect our longer-term planning. Although the overall economic forecast is now more positive, the withdrawal of the Winter Fuel Allowance coupled with predicted energy price rises and possible tax rises may mean many families aren’t out of the woods yet.

You might think that financial advisers can’t do much to help. But it’s during the hard times that expert advice can really come into its own. Both for your peace of mind, and your family’s financial wellbeing.

Here, we explain how financial planning and expert advice can help you protect your short- and long-term financial security.

Talking about money – especially with other family members – can be a challenge in itself. Those conversations can escalate to emotional exchanges and arguments. No wonder many of us would rather not bring up the subject of money until we absolutely have to.

We’re known for expert financial advice. But we’re also known for helping people to have better conversations about money. This is especially true when ‘things are tight’. Involving an adviser who’s one step removed and can explain all the options to all parties can help resolve conflict.

Starting a conversation about how you’re going to manage, or how worried you are, is the first step towards feeling better about it. It’s also the first crucial step to getting your finances back on track.

You may already have a ‘financial plan’ – even if you call it a ‘budget rather than a plan – that helps you reach your goals. This could include careful household budgeting, saving into ISAs, monthly contributions to pensions or investments, or insurance policies. All tried-and-tested, prudent strategies.

However, if prices rise along with inflation, as we saw in 2021 and 2022, some of these best-laid plans can fall apart. You might start to feel you can’t keep up with regular pension contributions or savings, when you’ve got to reach deeper into your pocket to meet day to day outgoings. It’s tempting to put those longer-term objectives on hold while you deal with the short term.

Tax regulations around pensions, inheritances or capital gains can change too, and your plan needs to adapt to keep you on track.

We spend every day creating specific, actionable plans to help people achieve this, based on realistic calculations of how much we think they’ll need. We can tweak and fine-tune these plans so that people who may feel they cannot afford to save for retirement, for example, can continue to do so.

Past performance is not indicative of future performance. The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is dependent on individual circumstances.

In The Picture

The graph shows the movement of interest rates from the Bank of England, European Central Bank and the Federal Reserve over almost 40 years. While we expect to see interest rates cuts continue in the short term, we believe they won't go as low as they did in the decade that followed the global financial crisis. Our view is that rates are likely to settle somewhere higher for longer.

The Last Word

“I proved everyone wrong, I wasn’t going to be denied tonight”.

Heavyweight champion?Daniel Dubois on his victory against Anthony Joshua in front of 96,000 fans at Wembley stadium.