The US managed to narrowly avoid a historic default on its debt obligations at the start of June. A last-minute deal between Democrats and Republicans has suspended the government’s borrowing limit until 2025 – it means the US government will continue to be able to borrow money.
What is the US debt ceiling?
As the US government typically spends more than it receives in taxes, they rely on issuing debt to fund spending. However, rather than just allow the country’s debts to increase unchecked, the US Congress sets a limit on the total amount that the country’s government can borrow. This is referred to as the debt ceiling, and it hit the limit of $31.4tn in January.
Since then, the country has been using ‘extraordinary measures’ to service its debt. This effectively means that the treasury has suspended new investments into various government initiatives.
The government was expected to have run out of money on 5 June. So if the ceiling wasn’t raised or suspended by that date, the US would’ve defaulted on its debt for the first time. This would’ve included being unable to pay obligations like military salaries and benefit payments.
What could default have meant for stock markets?
A default for the US government would’ve been unprecedented. The cost of US government borrowing (how much interest they pay) is used extensively across financial markets as a base for valuing other assets and determining expected returns. This makes it even harder to fully understand the impact that a US default would’ve had.
It also would’ve brought huge uncertainty for anyone receiving money from the government. It’s possible wages and benefits, for example, might not have been paid. This would’ve inevitably had wider knock-on effects to spending across the US economy.
US job market remains strong
Elsewhere in the economy, the US job market continued to shrug off higher interest rates, adding 339,000 new jobs in May. This came in much higher than the expected addition of 195,000 new jobs.
Given that employment and wage growth are core drivers of inflation, this strength could indicate that inflation will stay higher for longer and be stickier than expected. The continued strength of the US labour market adds to the headache for policymakers.
The series of interest rate increases implemented by the Federal Reserve (Fed) are aimed at cooling the economy and taming inflation. But with a strong jobs market, it means the Fed could keep raising interest rates further. Before this latest labour market data landed, it was expected that after 10 consecutive interest rate rises, the Fed would finally hold rates steady – that’s now in doubt.
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. Investments and any income they produce will rise and fall in value, meaning you could get back less than you invest.
For more details on each fund and its risks, you can use the links to their factsheets and key investor information below. Past performance is not a guide to the future.
The strongest performer out of our Wealth Shortlist US funds over the last year has been the Baillie Gifford American fund.
The fund rose 10.38%* over the past 12 months, outperforming the IA North American sector average. Performance was helped by the fund's ‘growth’ style of investing coming into favour in 2023.
The fund had a difficult 2022 as interest rate rises and spiralling inflation prompted investors to move away from stocks with high growth potential. However, with inflation now falling and the nearing of the top of the interest rate cycle, investor sentiment has improved.
The fund aims to outperform its benchmark over five-year periods, with a concentrated portfolio including some exposure to smaller companies. Both of these factors increase risk.
The fund’s growth focus can also lead to some periods of short-term ups and downs.
The weakest performer over the past 12 months was Artemis US Smaller Companies, having returning -7.53%, compared to -3.07% for the Russell 2000 index.
The fund has struggled as high inflation and rising interest rates have made investors question the future prospects and earning potential of the growth companies it invests in.
The fund also suffered following the US regional banking crisis. A number of the companies owned in the fund in the financial sector sold off after regional banks showed signs of weakness, resulting in some collapsing. Remember though, past performance isn’t a guide to the future.
What caused the US banking crisis and what could come next?
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
| 31/05/2018 To 31/05/2019 | 31/05/2019 To 31/05/2020 | 31/05/2020 To 31/05/2021 | 31/05/2021 To 31/05/2022 | 31/05/2022 To 31/05/2023 | ||
|---|---|---|---|---|---|---|
| Baillie Gifford American | 7.98% | 49.74% | 54.89% | -44.69% | 10.38% | |
| IA North America | 7.27% | 11.85% | 24.23% | 6.36% | 2.58% |
Past performance isn’t a guide to the future. Source: *Lipper IM, to 31/05/2023.
Annual percentage growth
| 31/05/2018 To 31/05/2019 | 31/05/2019 To 31/05/2020 | 31/05/2020 To 31/05/2021 | 31/05/2021 To 31/05/2022 | 31/05/2022 To 31/05/2023 | ||
|---|---|---|---|---|---|---|
| Artemis US Smaller Companies | 7.44% | 11.34% | 37.09% | -11.11% | -7.53% | |
| Russell 2000 | -3.98% | -1.56% | 43.12% | -6.29% | -3.07% |
Past performance isn’t a guide to the future. Source: *Lipper IM, to 31/05/2023.
MORE ABOUT BAILLIE GIFFORD AMERICAN INCLUDING CHARGES
BAILLIE GIFFORD AMERICAN KEY INVESTOR INFORMATION
MORE ABOUT ARTEMIS US SMALLER COMPANIES INCLUDING CHARGES
ARTEMIS US SMALLER COMPANIES KEY INVESTOR INFORMATION
This article isn’t personal advice. If you’re not sure whether an investment is right for you, please ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.
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Our fund research is for investors who understand the risks of investing and that investing in 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.