The US finally delivered a ‘jumbo’ 0.5% cut, bringing the federal funds rate range to 4.75%-5%.
Many investors expected the Federal Reserve (Fed) to start lowering interest rates much earlier in the year.
However, the Fed has been extremely cautious as the US economy has remained extremely resilient.
For most of the year inflation stayed sticky at around 3.3%, above the Fed’s 2% target, and US unemployment was also still relatively in-line with its history.
So, what’s changed?
The US economy is in a good place and our decision today is designed to keep it there.
The main component to the Fed’s decision for finally lowering interest rates is that Fed Chairman Jay Powell believes the US economy is in a good place, and inflation is now under control – inflation fell from 3% to 2.5% from June to August.
However, while the economy isn’t in a bad place, many believe the Fed thinks it’s starting to slow.
Until the week before the Fed’s decision, only a small proportion of investors believed it would cut interest rates by 0.5% rather than 0.25%.
However, because rates were cut by more than 0.25% for the first time since 2020, many analysts think there could be underlying concerns the Fed are now trying to get ahead of.
Over the last few months, the labour market has certainly weakened. The unemployment rate has been on an upward trend since the start of the year and the fluctuation in the number of jobs created has been volatile.
In July the US added just 89,000 jobs. In March this year they added 310,000.
The Fed has made it clear it doesn’t want to see further weakening of the labour market as it tries to steer the US economy to a ‘soft landing’.
The Fed is also expected to cut interest rates again in 2024 and will likely continue to cut rates into 2025.
How has the stock market reacted?
Since the Fed cut interest rates the stock market has reacted positively.
The wider US stock market closed at a record high the day after it was announced.
The Russell 2000 index, which is made up of small and medium-sized companies, also rallied.
Smaller companies are often seen as having higher average levels of debt and more reliant on credit than their large-cap peers. So, lower interest rates are seen as a positive for them.
The impact of a tight US Election
Three months ago, we were expecting a re-match of Trump vs Biden for the 2024 US Election and at that time Trump was leading the polls. Since then, Biden has stepped off the ballot and has been replaced by current Vice President Kamala Harris.
With just over a month until arguably the most important election in the world, Harris has been able to clawback voters and the election is on a knife edge.
We saw the first and possibly only presidential debate that Trump and Harris will have earlier in the month and the consensus was that Harris came out better.
It also helped Harris grow a small lead over the former president.
National polls suggest her lead has grown since the debate. But she still only holds a small 2.7% lead on Trump.
How important are the swing states?
We know all too well that only a small number of votes actually matter when it comes to who wins the election.
Most states typically vote the same way every time, but some states known as ‘swing states’ have historically voted for both parties. These are often the key battle grounds for the nominees in a bid to turn the state red or blue.
Polls are suggesting that Harris has a small lead in the seven swing states which could determine the outcome of the election. She’s currently polling better then Trump in four out of the seven states however, the margins are extremely close.
Harris has a less than 1% lead in Nevada and Trump has a less than 1% lead in North Carolina. Polls always come with margins of error and leads of this size aren’t at all conclusive.
All seven of these states could change one way or another before the vote in November.
How have the US Wealth Shortlist funds performed?
Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
This article isn’t advice. Investments and any income they produce will rise and fall in value, meaning you could get back less than you invest. If you’re not sure if an investment is right for you, ask for financial advice. Remember, past performance isn’t a guide to the future.
For more details on each fund and its risks, you can use the links to their factsheets and key investor information below.
L&G US Index
The strongest performer of our Wealth Shortlist US funds over the last year was the L&G US Index fund.
The fund rose 21.52%* over the past 12 months, outperforming the IA North American sector average.
The market has been very concentrated, with only a small number of companies outperforming the market. For example, the ‘magnificent seven’ (Amazon, Apple, Alphabet, Meta, Nvidia, Microsoft and Tesla) have made up almost half of the returns for the S&P 500 so far this year.
This makes it harder for active fund managers to outperform as they’ll typically hold much more than seven stocks. It also means they might not hold some or any of those magnificent seven stocks that have led the market.
FTF Royce US Smaller companies
The weakest performer over the past 12 months was FTF Royce US Smaller companies, returning 6.82.%, behind the IA North American smaller companies sector average and Russell 2000.
We don’t expect all the funds on the Wealth Shortlist to perform in the same way. We think it’s important for investors to build a portfolio filled with managers who have different approaches and investing styles to help generate long-term returns.
Annual percentage growth
31/08/2019 - 31/08/2020 | 31/08/2020 - 31/08/2021 | 31/08/2021 - 31/08/2022 | 31/08/2022 - 31/08/2023 | 31/08/2023 - 31/08/2024 | |
|---|---|---|---|---|---|
Legal & General US Index | 12.58% | 26.39% | 4.41% | 5.09% | 21.52% |
IA North America | 9.30% | 28.18% | 0.61% | 4.14% | 19.15% |
FTF Royce US Smaller Companies Fund | -1.99% | 39.90% | 6.86% | 5.03% | 6.82% |
IA North American Smaller Companies | 3.27% | 37.06% | -6.39% | -1.99% | 11.85% |
Russell 2000 | -3.57% | 43.09% | -2.88% | -3.90% | 14.23% |