WeeklyWatch – No waning in interest over interest rates

6^th August 2024

Stock Take

Interest in interest – The UK decides on a cut

Last week serves as a good example of why estimating short-term market moves is so hard.

All eyes were focused on central banks at the beginning of the week as investors awaited an expected rate cut in the UK and to hear the plans of the US Federal Reserve. And, true to predictions, the Bank of England cut interest rates for the first time in four years last week.

The rate cut has been expected for a while, and the change didn’t cause too much disruption to the FTSE 100. Inflation challenges still loom, and as a result, more reductions are likely to be put into force – but gradually.

The choice to cut interest rates was also influenced by the new Chancellor, Rachel Reeves, and her outline of her initial findings within her first few days in the role. Reeves says she’s identified a multi-billion-pound black hole in UK finances that will need to be paid off; however, her assertions have been contested by her predecessor, Jeremy Hunt. These findings suggest that there will be some form of tax increase implemented in October.

US interest rates under the ever-watchful eye

Across the pond, the Federal Reserve chose to maintain the USA’s interest rates for the moment. Jerome Powell, Chairman of the Federal Open Market Committee, stated that it would be likely that interest rates will be cut in September and there had been unexpected resilience in the US economy.

However, by Friday, markets started to fall, and the weaker than expected economic data and poor results in the US gave rise to concerns over a recession in the making.

One of the culprits for the poor performance was the job data that was released on Friday, where it showed that only 114,000 jobs were added in July – seriously under the 175,000 job number expectations. And to make matters worse, unemployment rose to its highest rate in three years to 4.3%.

And several companies added further bad news to the pile. McDonalds stated that branches open for at least a year saw sales drop by 1% in the second quarter in comparison to the same time last year. Amazon and Microsoft also saw weak growth in their shares – a drop that has given cause for concern, especially as the two companies have been responsible for powering a large amount of equity growth since the recession. At the same time, Intel announced thousands of redundancies and a dividend freeze, which saw their shares drop dramatically to levels not seen this millennium.

US indexes take a tumble

By Friday, the US market was in a tricky situation – the NASDAQ and S&P 500 indexes were down far below where they started, down by nearly 4% and nearly 2% respectively.

Indeed, this could be a market overreaction, as there were still several companies like Facebook that enjoyed strong performance. And if US employment data improves in the following month, there could well be a shift in sentiment.

At the Jackson Hole Economic Policy Symposium at the end of August, Jerome Powell will make a speech prior to meeting with the Federal Reserve for further discussions regarding the potential September interest rate cut. With all the financial dips and disappointment, the meetings are bound to incur much wider public interest.

Struggling Japanese markets

Japan’s markets were among one of the worst performing at the end of last week. The Bank of Japan raised interest rates on Wednesday, which resulted in the strengthening of the yen against the dollar. This news coincided with growing recession concerns in the USA and caused much tension for Japanese companies, especially as the Nikkei Index took a significant fall last week. The bad luck continued into this week, and on Monday the index fell by 12%.

Having said this, the Head of Asia and Middle East Investment Advisory and Comms at St. James’s Place, Martin Hennecke, said that international investors will not have suffered too much from the falls. He stated:

“It should be noted that international investors allocating to Japan equity strategies are typically seeing the Japan market drop cushioned by the yen gain in their portfolios. In any case, we recommend remaining calm and not being prompted into knee-jerk reactions by these latest developments. Equity valuations in Japan actually happen to be attractive historically speaking, and it remains to be seen how much more tightening (if any) the Bank of Japan could afford given high sovereign debt levels coupled with the recent market turbulence.”

The temptation to react too rashly at a rapid fall should be avoided, although it’s difficult given the 24-hour news cycle bringing any movements to the forefront of our minds. The Investment Research Director at St. James’s Place, Joe Wiggins, said resisting knee-jerk reactions are what ensures long-term success. He stated:

“Volatility and uncertainty are a feature of equity markets over the short term. Although it is impossible to consistently anticipate periods of drawdown, we know that they will happen. The real danger of such occurrences is not usually the losses themselves but the poor decisions we are prone to make when they arrive. To deliver good long-term outcomes, following our plans and avoiding emotional responses to periods of stress is absolutely essential.”

Wealth Check

Saying a fond farewell to your business

It’s understandable as to why entrepreneurs form such a big emotional attachment to their businesses. They’ve invested a huge amount of time, effort and money into crafting and building it, making many sacrifices along the way to help it succeed over the years. You could say that it’s part of their identity!

But when it comes to letting a business go, whether that’s down to liquidation, sale or retirement, it’s a stake-in-the-ground moment and is bound to create a whole array of mixed emotions. As well as practical matters, it’s a good idea to get yourself emotionally prepared for exiting your business.

Learning to let go

Emotional attachment to your business can be recognised in several ways; this could include a deep care for the team, your clients and your proposition. And while these practices yield positive results, the downside to this approach is that rational and hard-nosed decisions are harder to make. This kind of emotional mindset can result in owners pulling out of a sale process or making matters difficult for new buyers due to feeling over-anxious over the new direction that the company will take and not trusting that the new owners will do right by the business and serve clients and stakeholders well.

It’s an emotional rollercoaster

Prior to selling a business, it’s important to go through a thorough due diligence process with the potential new buyer – this can be emotionally difficult and draining. Once an agreement and sale have been made, there’s usually a strong feeling of relief and happiness. These plans can be years in the making, so it’s a huge achievement when it comes together.

However, when the reality of change starts to sink in, emotions can become more turbulent.

When you’ve chosen to exit your business, there are many other financial questions to consider, including:

• How do I invest a lump sum from a sale?
• How do I start withdrawing my pension, other income and insurance cover that I require?

Careful planning of these issues will help stabilise the emotional side of the process and enable you to make more rational decisions.

How can Wellesley help?

As you plan your business exit, we can assist in providing important advice and be a good sounding board. We can help you address your pensions, protection and investments, and even help with cash-flow modelling.

We can show you how far your money will go in many different situations and work with you to help plan and take control over your income and outgoings. We also have an extensive network of consultants, tax advisers and other ex-business owners that we can successfully refer you to who can assist you in specific matters.

Past performance is not indicative of future performance.

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.

Exit strategies may involve the referral to a service that is separate and distinct to those offered by Wellesley.

In the Picture

Even though there’s doom and gloom surrounding the economy, reasons to be cheerful can be found in recent figures, which indicate that the UK population is saving a higher proportion of its income now than before the pandemic.

The Last Word

“I guarantee you will regret taking part in this disorder, whether directly or those whipping up this action online and then running away themselves.”

– Sir Keir Starmer, UK Prime Minister, promising action against those involved in the recent riots that have spread across the UK.

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 St. James’s Place.

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© S&P Dow Jones LLC 2024; all rights reserved.

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SJP approved 05/08/2024