The smoothest outcome for investors from next Tuesday’s US election would be a Clinton victory but with the Republicans continuing to control the House of Representatives, ie, “more of the same”.
However, news of the FBI’s renewed examination of Clinton’s emails means the election outcome is back to being close. While some of Trump’s economic policies could provide a fiscal and supply side stimulus to the US economy, a Trump victory is likely to be initially negative for shares and favour safe havens like bonds and the US dollar as investors would fear his policies on trade in particular. This would be negative for Australian and Asian shares and for the growth sensitive $A.
The mostly gloomy debate around the Australian economy often gives the impression we are in a constant state of crisis.
But economic growth is pretty good, the economy has rebalanced without the (“inevitable”) recession, the worst of the mining bust looks to be behind us, public infrastructure spending is ramping up, consumer and business confidence are around long term averages, share market profits have likely bottomed and Australia stacks up well on social considerations.
These are all reasons to be reasonably optimistic about the Australian economy and Australian assets.
The malaise in financial markets is continuing with Australian shares now joining Europe, Japan and emerging markets in a bear market.
Global growth worries could drive more short term weakness. But in the absence of a US/global recession it’s hard to see a deep and long bear market.
The key for investors is to recognise that periodic declines in share markets are normal, that selling after big declines just locks in a loss, that dividend income from a well-diversified portfolio is little affected by share market volatility and that income flow from Australian shares is now very high relative to bank deposits.
2015 has been a messy year for investors as worries about China, emerging countries and the Fed caused volatility and uneven returns across asset classes. Australian shares continued to underperform.
2016 is likely to see continued okay but uneven global growth, low inflation & easy monetary conditions. While the US is likely to raise rates gradually, other countries including Australia remain biased to further easing.
Most growth assets, including shares are likely to trend higher, resulting in reasonable returns. But volatility is likely to remain high as the easy gains are well and truly behind us.
The main things to keep an eye on are the Fed, China and the ongoing rebalancing of the Australian economy.
Risks regarding China and the Fed may be receding a bit for now but there remains plenty to keep an eye on including the risk of an “accident” flowing from slower emerging market growth and the plunge in commodities.
However, our broad assessment remains that the cyclical bull market in shares is likely to reassert itself in the seasonally strong months into year end.