President Obama and Republican candidate Mitt Romney will be feverishly campaigning in the states that could swing the result, while commentators in our world look at the impact each candidate could have on the US economy and thus its equity and bond markets.
Thomas Higgins, Global Macro Strategist at BNY Mellon boutique Standish is one such pundit and says neither the Democrats nor Republicans will want to be accused of sending the American economy back into recession.
To avoid this he predicts they will agree to postpone the debate on major issues such as entitlement and tax reform and allow for a temporary extension of most of the tax cuts and a renewal of key spending provisions.
“This will amount to a stepping back from the cliff, but will still create a fiscal drag of about 1.4% on GDP growth for 2013. The Fed’s third round of QE should partially offset this by mitigating financial conditions and supporting the housing market,” Higgins adds.
But as we know, GDP growth and stock market performance are not intrinsically linked. Since this time last year the Dow Jones has risen from approximately 11750 to 13000 and the S&P 500 has risen from 1235 to 1418.
This is despite all the uncertainty surrounding the US “fiscal cliff” and because companies in the US paid down their debt and rebalanced their cashflow much quicker than in some other areas of the developed world.
Fundamentals to be considered
It is this, rather than the wrangling of the political elite that has to be posed as an asset allocation consideration. Cheaper regions such as Europe and the UK have underlying risks priced in, while in the US downside is significant and upside is limited.
Stephanie Kertz, a member of the investment strategy team for private banking at Lombard Odier, says: “Are the elections really a game-changer? On the fiscal front, although we have little doubt that major fiscal cliff consequences will be averted, the status quo is no alternative.”
She says both Obama and Romney’s plans, respectively to spend the way into a sustainable recovery or lower taxes to create a business-friendly environment, are flawed.
In addition the current recovery is the weakest on record because of excessive debt levels and until these are addressed all that can be expected is continued weak growth, no matter who is elected.
Meanwhile, if Federal Reserve chairman Ben Bernanke is not reappointed at the end of his term in January 2014 and if the new chairman followed less aggressive monetary policy Kertz says it could “trigger a collapse of overvalued and liquidity-addicted US equities”.
So from a valuation perspective there are more enticing markets and from a growth perspective there are too.
Relatively small impact
Dan Morris, global strategist at JPM Asset Management, also warns against placing too much worth on the upcoming elections: “While it is easy to think that the president has great influence over the course of the economy, their power is quite limited. Government spending in the US makes up a smaller percentage of GDP, just 18%, than it does in other developed countries, so the direct impact on the economy of government activities is limited. And Congress makes the spending decisions.
“Politics and elections certainly matter, but we believe investors should focus on fundamentals and the construction of a well-diversified portfolio when making their asset allocations. The appreciation of the US equity market reflects, we believe, the dynamism of the economy, and that should continue well after 2 November, regardless of who wins the day.”
Are you changing clients’ asset allocation ahead of the US election, or is it irrelevant to you when looking at American markets over the longer term? Use the comments box below…
