US debacle won’t stop the bull run

The US still has serious issues to resolve … but they won’t stop the markets going up.

Summary: The US debt crisis isn’t completely over, it has just been postponed. But the political push to achieve a workable solution before year-end will restore calm for investors and further improve the outlook for equities.
Key take-out: The high degree of under-investment by fund managers will push the Dow Jones Index to new highs and drag all global equity markets along with it.
Key beneficiaries: General investors. Category: Economics and strategy.

We have all heard far too much about the US problems of late regarding the basic funding of government and the requirement to raise the debt ceiling to avoid a default.

Earlier this week we had the ‘near default’ moment but logic prevailed and the issue has now been moved out to next February.

Yet, there are still some interesting angles on this whole debacle worthy of consideration, especially in the interest of grasping an understanding as to what may happen next, and what the lasting impact on equity markets will be.

Has anything really changed?

The same core Tea Party members will still be pushing for the attachment of wind-back provisions to the next bill to deal with funding and debt in just a few months.

It has to be noted that there are very senior extremists within the Republican movement who are not scared of a US default. Some would even welcome it and believe the US should fully default, as the debt is the result of previous generation’s mistakes. Don’t worry though, they will never fully get the upper hand. Every nation has such groups, but that is what democracy is about in steering towards a reasonable middle course.

It will be a question of whether Majority House Leader John Boehner can contain those internal party forces, and also if President Obama will relent and give at least some ground. I believe the potential for both to achieve such an outcome is very high, much higher than we would previously have thought. Because these are the very two men who have lost the most from the recent confrontation. While the polls show the Republicans to be the biggest losers in terms of voter satisfaction, there is no doubt damage has been done on both sides.

Quite simply, the two most powerful men in America – Obama and Boehner - are diminished, and both are keen to perform, this time at least, for the American people instead of special interest extreme groups on both sides. This will be a dramatic shift, and one that will serve America well into the future. Just as the sovereign debt crisis in Europe scared legislators into creating the now most fiscally responsible economic region on Earth, so too will this near default scenario, with its intensity shifting American politics in a lasting fashion.

The US market outlook

The outlook then for asset classes generally is quite positive. In fact, apart from false fears about tapering, there is no other major issue left standing between where we are now at 15,030 and 20,000 on the Dow Jones Index. I first made this forecast as a three to five-year prediction a couple of years ago. My then considered extreme view has only been steadily encouraged by the run of events and economic data to this point.

The Australian situation is even better!

Australia, with a huge cultural chip on its shoulder, has in recent years greatly over-reacted to events in Europe and the US. Now though at last, it seems to be seeping into the minds of fund managers and investors everywhere that Australia is part of China/Asia, an integral supplier of essentials minerals and agricultural product, and that the greater prosperity path is still where the region is soundly positioned.

Australian stocks are extremely under-valued, and resource stocks even more so. For the first time in several years both global and domestic investors are beginning to recognise the absurd historical oddity of current valuations, and the race is on to buy and own quality Australian companies.

This bull run has only just begun: Today we are at 5,306 and an ASX 200 at much higher levels, perhaps even 5,700 by year-end, is on the cards.


Clifford Bennett is chief economist at Investor Unity. www.IU.com.au/UP