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Views on the News

17 June 2024

3 minute read

A weekly round-up of the leading business, personal finance, investment, savings and pensions stories in the press from the past week, including analysis and opinion from our experts.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • US Fed pencils in one interest rate cut this year
  • UK economy fails to grow during April
  • How UK investors can overtake the racy US – reinvest your dividends.

Headline 1: US Fed pencils in one interest rate cut this year

The US Federal Reserve (Fed) has signalled that it will cut its key interest rate just once this year despite inflation easing.

The new outlook emerged after the Fed voted to hold interest rates at their current 23-year high even as inflation ticked lower.

Inflation, which measures the pace of price rises, slowed to 3.3% in the year to May. That compares with 3.4% in the 12 months to April.

Francis Addai, CFA, Senior Investment Strategist: The Fed kept interest rates unchanged. More importantly for markets however, the Fed pushed back the likely start of its easing cycle as the median Federal Open Market Committee member reduced their 2024 projected cuts to 25bp from 75bps in March.

Policymakers see year-end inflation at slighter higher levels than they did in March. It is worth noting that these changes are due to a lack of progress on inflation so far this year rather than higher expected inflation in the future. Overall, the recent softer US inflation print would have added increased confidence of a sustainable path to the 2% inflation target.

Interest rates markets are not in agreement with the Fed however, as the swap market implies there will be more likely two cuts this year. Bottom line, the US economic data will determine whether the Fed cuts once, twice, or not at all this year.

Headline 2: UK economy fails to grow during April

The UK economy failed to grow in April after particularly wet weather affected consumer spending, according to the Office for National Statistics (ONS).

The sluggishness comes after the UK economy recorded its fastest growth in two years from January to March, exiting the recession it fell into in the final half of last year.

Spending on services grew for the fourth month in a row, but this was offset by falls in production and in the construction industry.

Francis Addai, CFA, Senior Investment Strategist: On its own, the cooling growth picture in the UK is unlikely to influence the Bank of England (BoE) in its decision-making this month. However, the combination of cooling growth, a softer employment market, and declining wage growth will provide much needed ammunition for the BoE to maintain its current path to cut interest rates.

The fact that wages cooled even as there was an increase in the national living wage should help soothe central banker nerves on the potential for a summer policy error. The exact timing of the first interest cut however remains uncertain.

While certainly not our base case, a notable risk to the outlook is that, despite the softening in employment, a large proportion of the population outside the labour force – due to adverse population trends and lower participation rate – could leave the supply of labour relatively low, and result in upward pressure on wages. This scenario would likely see the BoE take a more cautious approach to its rate setting policy.

Headline 3: How UK investors can overtake the racy US – reinvest your dividends

Which would have made a better investment over the past 25 years – the US stock market, which returned 415%, or the UK, which returned 348%? Note that past performance is not a reliable guide to future performance.

Clearly, at face value, the US is a slam dunk. But, that's not the full story.

Because if you had reinvested the income you received from your investment every year, it is the UK tortoise, not the US hare, that wins the race.

With dividends invested, the US stock market – as measured by the S&P 500 index – returned a tidy 662% over 25 years. But the UK's FTSE 250 index would have grown your money by even more – an impressive 691%.

Clare Francis, Director of Savings and Investments: Reinvesting income can be a major factor in long-term returns for investors.

A main benefit of reinvesting income from your investments is that it is the cheapest and easiest way to increase your holdings over time.

Any reinvested income can be used to buy more shares which will potentially grow in value and boost your overall returns. In simple terms, your returns also earn returns, which is known as compounding.

The decision to reinvest income from your investments will, of course, depend on your personal circumstances. You’ll also need to consider whether you want to increase your investment in a particular company or fund simply because you received a dividend from it. You might decide you’d prefer to take the cash from the dividend and then invest that money somewhere else, or use the cash for another purpose.

Remember that, like the value of the investments that produce them, dividends and interest payments can fall as well as rise, and past performance, including past dividend payments, shouldn't be relied on as a guide to what could happen in future.

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Word on the Street is a news and financial markets podcast where leading investment experts discuss events that have been making the headlines.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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