Although global investors appear worried about America’s so-called ‘fiscal cliff’, Wall Street is proceeding on the basis that common sense will ultimately prevail and that Washington will manage to strike an 11th hour compromise.
Indeed, the US S&P 500 index has bounced back 5% in recent weeks, largely recovering half the decline in market since mid-September. At this stage, the US market remains in a firm uptrend, and the latest market pull-back appears just another healthy correction.
Wall Street’s resilience is good news for global risk markets as it is one of the best leading economic indicators around. It suggests the US economy is unlikely to stumble into another recession anytime soon.
Note, moreover, the US market has outperformed our own for the past few years, and those wanting some exposure to the market have several locally-listed exchange-traded funds to choose from in order to take advantage of that growth.
There’s Vanguard’s total US market ETF (ASX code VTS), for example, and it charges an annual management fee of only 0.06%.
What’s more, there are grounds to believe the consensus view that America will only grind out modest growth in the next few years could be wrong.
For starters, the US housing market is clearly on the rebound with the availability of affordable housing at multi-decade highs, home building at the lowest level since the early 1960s (despite a much larger population today), which in turn has helped bring the previous glut over homes on the market down to more usual levels. Once the US housing market turns, it can provide a powerful contribution to US economic growth.
America is also undergoing a positive supply shock caused by new technologies that are allowing the exploitation of previously hard-to-tap reserves of oil and natural gas found in deep underground rocks formations. The ‘shale oil’ boom has already cut the price of gas for American consumers and business and promises to turn America from a major energy importer to net exporter.
Cheap energy combined with a cheap currency is helping the US manufacturing sector. Indeed, a number of US firms have recently announced some ‘on shoring’ of manufacturing production back from China – as, along with America’s cheap currency, China is also starting to lose some relative cost competitiveness due to rising wages, environmental regulations, and failures to respect intellectual property.
As for exports, while America’s European export market still remains sluggish, growth prospects in emerging markets – from Asia to Latin America – remain more positive. And corporate America also continues to benefit from strong internationally recognised brand names and expert management. Home to companies such as Apple, Google, eBay and Amazon, the US also remains the centre of the global technology revolution.
History also suggests America’s recovery should soon pick up a notch. US recessions usually last less than a year, and recoveries tend to be stronger the deeper the recession. Following a financial crisis, – as in the late 1800s, the early 1930s and arguably the early 1990s – recessions can last longer and recoveries are more muted.
But even after a financial crisis, the US economy has usually managed to start achieving solid growth by around five years from its previous peak. On the back of the very deep recession in 2009, the US economy looks likely to grow by around 2.2% this year, following growth of 2.4% and 1.8% in 2010 and 2011, respectively.
This marks the third year in a row since the global financial crisis that growth has been not much better than trend. So by historical standards, that suggests America could be overdue for a burst of above-trend economic growth and the markets will lead the way.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.
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