Wellesley WeeklyWatch – US Fed boosted its economic growth forecast

22 June 2021

Stock Take

Levelling up

One week after the US reported that inflation was just over 5%, the Federal Reserve (the US central bank) boosted its economic growth projections and brought forward its estimates for when it may increase interest rates. Although the Federal Reserve will maintain its high levels of support for the time-being, it has nevertheless started to prepare markets for a gradual withdrawal as the US recovery picks up steam.

Jerome Powell, Chair of the Federal Reserve, said projections for when conditions would be right to increase rates indicate this could take place in 2023 – contrasting with previous projections of 2024. Powell further shared that officials were “talking about talking about” lowering its asset-purchase levels in the future.

This is significant for investors because central bank actions have been a driving force behind the market recovery that started last year. Maintaining low interest rates (and other forms of support, such as bond purchases) means that central banks across the globe have helped to support asset prices during the pandemic. That said, now that economies are recovering, many are preparing to gradually reduce their levels of support. While this will go some way towards keeping inflation in check, it will probably also have a negative impact on some asset prices.

Following last week’s Federal Reserve meeting, it’s generally anticipated that discussions in the US will begin at its Jackson Hole meeting in August, with an announcement in the months ahead.

Even though the Federal Reserve has brought forward the date at which it will consider increasing interest rates, investors should be mindful that the big picture hasn’t radically changed in recent weeks, suggested Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund.

He wrote:

“It seems very wrong, in our view, to conclude that the economic backdrop has changed and equally wrong to think that the Fed has fundamentally changed its policy framework.”

Shock factor

Meanwhile, the UK Office for National Statistics reported last week that inflation had surged 2.1% in the year to May, following a jump in consumer spending and rising fuel prices. The FTSE 100 fell modestly over the following few days.

Pondering the current trend of rising inflation, David Winborne of Impax Asset Management, a Fund Manager for St. James’s Place, compared the current environment to that of 2016, when Trump was elected as US president.

“Even though it’s not an interest rate shock at the moment, we’ve got an inflationary shock. There’s a similar dynamic in terms of the particular sectors which are performing quite well.”

He went on to say that, while this may well prove to be a challenging environment for investors right now, the onward situation remains positive.

A lot of bottle?

The combination of the US Fed bringing forward its rate rise plans and UK inflation continuing to climb might have provoked wider market changes, yet it cannot be denied that footballer Cristiano Ronaldo provided the biggest stocks-and-shares story of the week.

Speaking at a UEFA Euro 2020 press conference, Ronaldo removed two bottles of competition sponsor Coca-Cola from view, swapping them for water. His actions caused the company’s share price to drop 1.6%, which amounted to a fall of approximately $4 billion.

Wealth Check

According to research from Royal London, many people are missing out on the benefits of pensions tax relief because they do not understand how it works.1

Of those surveyed, only 15% fully understood how tax relief on pension contributions works, and 27% disclosed that they have never even heard of tax relief. Meanwhile, six in 10 were unaware that they could contribute to the pension of a spouse or child.2

Pension contributions, freedoms and withdrawals are renowned for being complex. Changes to allowances in recent months and years – such as the lifetime allowance freeze, for example – have further complicated people’s understanding of what action they should take according to their circumstances.

The government recently rebuffed calls from the Treasury Committee to reform pensions tax relief, alluding to the intricacies involved in changing the current system.

The research showed, though, that once people make sense of how relief works, they viewed pensions in a more positive light and wanted to increase their contributions over time.3

Tony Clark, Senior Propositions Manager at St. James’s Place, said:

“As with all tax issues, it’s mainly about being aware of the situation, knowing what’s there and realising that you don’t necessarily have to solve the problem by yourself.”

Financial advice can help you better understand tax reliefs and how they relate to your individual circumstances. It can also contextualise them within your overall retirement strategy, to help clarify how you can meet your goals and objectives.

If you’re looking to maximise your pension, and wish to consider your best options for saving for retirement, open up the conversation today with your Wellesley financial adviser.

Sources:

1,2,3 Source: Opinium survey on behalf of Royal London, survey of 2,000 UK adults, June 2021

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

In The Picture

Last week it transpired that retail sales dropped by 1.4% between April and May in the UK, with people opting to dine out at reopened venues rather than doing their food shop in supermarkets. Furthermore, people also shifted some of their spending to physical shops. Nevertheless, online shopping is still at far higher levels than it was pre-pandemic, indicating that some new habits are certainly likely to stick.

The Last Word

We will monitor the position every day and if, after two weeks, we have concluded that the risk has diminished, then we reserve the possibility of proceeding to step four, and a full opening, sooner.

Boris Johnson announces a four-week extension to England’s national lockdown last week in response to rising case numbers.

The information contained is correct as at the date of the article.

BlueBay and Impax Asset Management are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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