Mid-Term Madness
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Hi all,
This week the new UK Chancellor Jeremy Hunt revealed the Autumn Statement which is set to have a significant impact on the current levels of inflation in the UK. Across the water, the US Mid-term elections have come to a result which went right to the wire. A familiar face (who you can probably guess) has also put their name forward as the first republican to run for the 2024 US presidential election. Enjoy!
The Rich are getting poorer
On Thursday, Jeremy Hunt’s Autumn Statement included the announcement of an anticipated £30 billion in spending cuts and £25 billion in tax raises to counteract inflation and help to reinstate confidence in the UK’s political landscape. The highest tax bracket of 45% has seen its threshold decreased from £150,000 to £125,000, coupled with a rise in dividend and capital gains tax; essentially disincentivising investing, particularly in value stocks; which typically pay more dividends; and are more likely for investors to seek refuge in during these uncertain times.
This era of austerity that we are entering is set to see real disposable incomes fall 7.1% over the next two years, the biggest decline in over sixty years, with higher taxes coupled with high levels of expected inflation being the perfect cocktail for decreasing real income. One of the most striking observations that have been made regarding Hunt’s Statement is that just a few weeks ago Kwarteng’s mini-budget was one of the largest tax cuts announced in living memory, which Hunt has made a complete U-turn on.
There have been several high-profile advocates and critics of Hunt’s Statement; with Ben Nabarro, chief economist at Citi feeling that higher taxes and lower spending were the ‘the bare minimum’ to begin to reinstate confidence in the UK’s financial approach and prevent the Bank of England from further increasing interest rates. Others, such as Sarah Olney (the Liberal Democrat treasury spokesperson) pointed out that the ‘already squeezed middle’ will be ‘pushed to the brink’ and Paul Johnson (director of the Institute for Fiscal Studies) highlighted that ‘we just got a whole lot poorer’.
FTSE 100 Index this week in reaction to the Autumn Statement, Source: Tradingview
A Country in Division
The results of the US midterm elections unveiled that the Republicans will recapture control of the House of Representatives, albeit by a razor-thin margin; while the Democrats kept control of the Senate; also, by the narrowest of margins. Thus, we are entering into a new era of divided Government. The general consensus was that the Republicans would have performed significantly better in this election, particularly in the House, given that the midterms often act as a referendum of sorts on the party in power, in this case, the Democrats, who have not done little to inspire faith in voters under the presidency of Joe Biden.
Following the midterms, Joe Biden was quick to congratulate Republicans on their victory in the House and extend the olive branch in an attempt to work in unison to ‘deliver results for working families and ‘get things done (for the American people)’ during this era of hyper-partisanship.
The midterms are likely to result in some much-needed good news for investors in the US. A divided government and the inherent gridlock that it brings also go hand in hand with stability. It is more difficult for policymakers to pass new regulations and at least gives investors the impression that the future is more predictable (at least where regulation is concerned) and thus more investors place more confidence in forecasts that they make. Bonds may have been given the most tangible boost from the midterms, as it isn’t as probable that the divided government will be able to pass significant new spending regulations. However, it is the Fed that holds the most power regarding determining the outlook for the US economy and markets.
Trump ‘Un-president-ly’ running again
Earlier this week Donald Trump announced that he was running to become President of the US as he seeks to reclaim the keys to the White House, after he believes they were ‘stolen’ from him. Trump is the first Republican to officially announce that they will run for President in 2024. The US mid-terms recently saw many of Trump’s hand-picked candidates underperforming and many Republicans who wouldn’t necessarily subscribe to Trump’s ideology paradoxically overperforming. Whether this trend will manifest in the 2024 US Presidential race is yet to be seen.
Thanks for reading!
Oliver
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.