WeeklyWatch Markets slow as US debt concerns continue

30th May 2023

Stock Take

Debt ceiling concerns grow in the US

Investors have been concerned about the United States possibly defaulting on its debt for around a century, after the country’s many political challenges in raising its debt ceiling. The US has legal limits on the amount of debt the country can accumulate, and when debt reaches that limit, lawmakers must either agree to increase the debt ceiling or inform lenders that it cannot repay them.

The US debt ceiling has been raised 78 times since 1960. Twenty of those increases have happened since 2001.

The US government must now look once again at increasing its debt ceiling, with the deadline for doing so rapidly approaching. As investors were forced to ponder the consequences of the US not being able to fulfil its debt obligations, global markets had plenty of uncertainty to deal with last week.

UK inflation remains high

In the UK, these concerns coupled with unexpectedly high inflation data led to a decline in the markets – the FTSE 100 and FTSE 250 indices declined 1.7% and 2.6% respectively over the week.

The primary factor in these drops was the inflation figures announced by the Office for National Statistics. The annual CPI inflation rate in April dropped to 8.7% from 10.1% in March; however, this was largely because of the expiration of the comparison period that included the surge in energy prices due to the conflict in Ukraine in April 2022. Core inflation, which excludes the volatile energy, food, alcohol and tobacco prices, reached a 21-year high of 6.8%, up from 6.2%.

A thirteenth consecutive interest rate hike by the Bank of England is now expected by the market, which concerns equity investors because it becomes more expensive for businesses to borrow for improvements or to service existing loans.

More positively, the International Monetary Fund (IMF) is now predicting a 0.4% growth for the UK in 2023. It’s an improvement over their previous prediction in April, when they projected a 0.3% contraction in the UK economy. The change was due to a more positive outlook to resilient demand and falling energy costs, which improves investor sentiment.

Debt ceiling negotiation concerns impact the US stock market

The S&P 500 Index experienced a 1.1% drop on Friday, the largest fall in May. According to reports, some Republicans in the House of Representatives have questioned the urgency of the deadline set by US Treasury Secretary Janey Yellen, known as the ‘x-date’, regarding the government’s ability to meet its financial obligations.

These negotiations were resumed after President Biden returned from Japan, and it wasn’t until the end of the week that a deal was agreed between the president and Republican House Speaker Kevin McCarthy. At time of writing, the Bill still needs to pass Congress.

There have been many ‘last hour’ debt ceiling deals reached historically, usually with concessions from both sides. Despite progress over the weekend, there’s still pressure on the US government to get a deal over the line.

Looking ahead

The US Federal Reserve is due to meet on 14th June. Many Fed officials have re-emphasised their focus on combatting inflation, which is still elevated despite recent falls. Headline inflation has shown some improvement, but the Personal Consumption Expenditures price index inflation data increased last week, and services inflation continues to persist due to a robust labour market and high wage growth.

The US GDP growth for the first quarter was also moderately revised upward to 1.3% annualised, giving policymakers more room to increase interest rates.

Wealth Check

This week, we’re looking at a complicated area of tax-planning that trips many of us up: Capital Gains Tax (CGT). Getting your head around CGT and taking financial advice means you won’t end up paying more than you need to.

Put simply, when you sell something that has increased in value, CGT is a tax on the profits. It only applies to the gain you make, not the total amount of money you receive for the asset. If, for example, you bought shares for £10,000 and sold them for £15,000, then your capital gain is £5,000 – and that’s the amount assessed for CGT.

You have a personal CGT allowance for every tax year. For individuals in the UK, it’s £6,000 for 2023/24, which is reducing to £3,000 from April 2024. That means you can realise gains of up to £6,000 (after subtracting losses and applying any reliefs) at the moment without paying CGT. Unlike some other tax allowances, you can’t carry any unused allowance forward into the next tax year.

Almost any kind of personal possessions can be liable to CGT, such as: shares and investments, buy-to-let properties, second homes and other possessions like art. A financial adviser can help work out how much you need to pay.

Remember: you don’t have to pay CGT if all of your gains in one tax year are below your tax-free exemption.

Certain assets are also excluded from CGT, such as assets held in a pension or ISA. Your car and the home you live in are also exempt – unless you’ve used the property for a business, let it out or used it as a second home.

Assets you give away to charity also don’t have CGT applied to them. If you sell an asset to a charity for more than you paid for it or less than its market value, you could then be liable.

Ways to reduce your CGT bill include:

  • Gifting assets to a spouse or partner
  • Increasing your pension contributions
  • Making full use of your annual CGT allowance
  • Maintaining or improving your assets (e.g. writing off costs for improving a holiday home against tax).

Talking to a financial adviser you trust can help you feel confident about your decisions and comfortable that you’re in control of your financial affairs. If you’d like to get in touch with a Wellesley Financial Adviser, simply give us a call or email.

The value of an investment with Wellesley 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 and are generally dependent on individual circumstances.

The Last Word

“We should come together in unity and solidarity. We call for this with all our heart.”

– Turkish President Erdoğan celebrates winning another term after last week’s election.

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

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SJP Approved 30/05/2023