Prepare to have your sense of world order ROCKED

This week I have been obsessing about something you all need to know, which will change your whole understanding of the world you live in. No, not falling inflation, the probable replacement of Biden, the ascendancy of Trump, new tax data, the King’s Speech or any of that minor stuff.

No. It is this. Owls have long legs. Underneath their feathery skirts, they have legs! Google it! This is the start of a slippery slope which will rock your sense of world order. If owls look like that, not cute fluffy oblongs, then WHAT ELSE HAVE I MISSED?! What else do I think I know which is just plain WRONG?!

For those of you able to turn your minds to more mundane matters, successfully marching past the rabbit hole that is owls on TikTok, let’s proceed with this week’s financial snippets, some off-the-record opinion and the latest performance stats for easy-peasy ‘ready-made’ investment collections.

Falling wages…

On Thursday this week, new data showed that annual growth in average employee earnings eased back to 5.7% in the period from March to May. This is important for a number of reasons.

First, wage growth has been fuelling inflation and concerning the Bank of England. I’m on their Decision Makers Panel, and answer various monthly questions along with other business owners and CEOs, helping the Bank to make its decisions on whether to increase, hold or cut rates.

Many of their questions over the last few years have been about the specifics of our planned wage increases, to help them build an idea of what to expect. Obviously, interest rates would be much harder to cut if they could hear that wage inflation was likely to grow and stoke the economy. Sofalling wage inflation is a good backdrop for interest rate cuts.

…contributing to higher pensions

The closer we get to September, the more scrutiny we will see on wage growth. Why? Pensions. The much-debated triple lock is a commitment to increase the State Pension every year by the larger of 2.5%, inflation (currently 2%) OR average earnings (currently 5.7%) – and both the inflation and earnings numbers are taken in September. So it looks as though next year’s State Pension will go up by whatever wage inflation is in September.

If wage inflation is still 5.7% in September (unlikely - I suspect it will be a touch lower) that would be an extra £655 a year, taking the full State Pension up to about £12,155. Wages are forecast to fall sharply soon, but this could well be later than September, which would make pensioners relatively happy.

As the tax take jumps…

New data from HMRC this morning confirmed a hoofing big increase in the amount of tax we all pay, as frozen thresholds mean more of us pay more. Here’s one thing which caught my eye. Inheritance tax receipts hit £2.1 billion between April to June. Blimey! This is £83 million higher than the same period in the previous tax year, and this most hated of taxes keeps impacting more and more families, making planning absolutely vital. You can read my investment and pension tax-busting tips here or check out these 5 tax planning ideas from financial planners and tax experts, including thoughts on IHT.

…and Trump is back in town

And a final anecdotal observation. I had lunch with a Big Wig from a very large global Big Wig asset manager this week (I’m being cryptic!). Although they won’t say it publicly, they think that Trump will get back in, and they also think that this will have a buoyant effect on the S&P 500. They’re very bullish about the short-term for US equities. Also on their mind (which we’ll dig into a bit more in coming weeks), is how falling interest rates will likely favour mid-caps.

Mid-caps are not some strange form of headwear, but stands for middle capitalisation – capitalisation just means what a company is worth. So a large-cap stock is a magnum, a mid-cap is a bottle and a small-cap is a half bottle, for those who prefer champagne to shares! In the UK, mid-caps are represented in the FTSE 250 which is made up of the 101st to 350th largest companies listed on the London Stock Exchange.

Why might these mid-size guys do well when rates fall? Lower rates mean these companies spend less on servicing their debt, and also benefit from increased consumer spending as the economy frees up. History suggests they do relatively well when rates fall.

For those readers who feel weak at the thought of getting into these investment weeds, this week we published the very latest performance of the most popular ‘ready-made’ investment collections out there, so dig in if you want an easy solution for someone else to manage for you.

So there you have it. Leggy owls, wages, pensions, tax, Trump and mid-caps. Pass the smelling salts, I think it’s time for a lie down.

Holly

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