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Four economic postcards from the US

In the middle of the most volatile presidential election in a generation, the global gaze on the United States of America has rarely been so intense. Inevitably, this will affect the economy but what is going on behind the headlines and controversy? 

Having recently returned from two weeks in the US, where I spoke to investors, economists and others, I heard some fascinating insights into the current state of the country. Below are the four key takeaways I took from the trip.

"Demographic factors like population growth and the retirement of a more productive generation is hurting potential growth."
Mark Rider, Head of Investment Strategy & Portfolio Management, ANZ Wealth

THE LOUSY RECOVERY

Why is the US recovery so lousy, even given recent better data? It’s a question which came up a lot on the trip. There’s an increasing acceptance of the view demographic factors like population growth and the retirement of a more productive generation is hurting potential growth.

Still, it’s not all bad. The US unemployment rate is now below 5 per cent and the rate for the least-skilled workers has fallen by 2 per cent in the past year. Wages growth is picking up with real incomes now back to where they were before the global financial crisis.

This all provides support for consumption and the sustainability of the economic expansion.  The US economy is moving into a new phase and I think we are seeing that in these figures. That’s positive for the future.

ARE NEGATIVE RATES POSITIVE?

The discussion around negative rates was as the name implies: they are seen as negative and there are concerns around unintended consequences of the move. There’s a groundswell building for central banks to stop additional easing measures and building pressure on governments to spend.

The Fed is expected to raise rates once before the end of the year, probably in December and gradually - very gradually - thereafter.

With $US3 billion in bond purchases by major central banks this year and next, this is more than $US800 billion in excess of what is being issued by governments, and many hope that this will keep yields anchored for the foreseeable future.

THE LEAST-WORST OPTION

Australia got sick of two months of election earlier in 2016. We should take pity on the US, which has been through 12 months so far and still has around two to go.

When looking at the US election, despite the various issues, at its core it is all about personality. Research shows both candidates are heavily unfavourable, meaning the focus is all on Hillary Clinton’s health and emails and Donald Trump’s next gaffe.

Historically, a good indicator of who will win the US election is the performance of the S&P 500 in the three months leading up to the vote. In 19 of the past 22 elections a rise in the market favoured the incumbent party.

From August 8 to September 12 the US market has shed 1 per cent. While there are still two months to go, all signs point to a tight contest. It looks like the market is positioned for a Clinton win but is hedging as it is dangerous to write off Trump.

SPEAKING OF MARKETS

While I was in the US, the S&P, Dow Jones and Nasdaq all reached record highs at the same time for the first time since 1999. A sense of complacency was evident towards the market, particularly in bonds.

The general consensus was bond yields were low and pretty much no matter what happens they are going to stay low. Investors are confident they can base what they are doing on the expectations they will stay that way.

Wall St remained confident despite warnings around various dangers. There was some talk of the similarities between the current market and the tech bubble, with a tech company, this time Apple, at the top of the pile and technology one-fifth of the S&P market cap.

That complacency and its implications for markets is a concern and with bonds and shares expensive, the risk is for weakness in both in the short term.

Mark Rider is Head of Investment Strategy and Portfolio Management at ANZ Wealth

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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