Charles Schwab

CHARLES SCHWAB on the uS Market

‘All eyes on the US’

The seemingly endless campaign season and subsequent US election is now complete, but the world’s eyes stay firmly on the US as uncertainty around the fast approaching ‘fiscal cliff’ remains. We are in fairly unprecedented territory with a lame duck congress faced with such important business to resolve before adjourning for the year, and at this point there is still very little clarity as to what the outcome will be. If no action is taken to address the fiscal cliff, the current trend of modest economic growth could be negatively offset by the cliff’s impact and cause a recession. However, with a modest agreement to forestall most of the cliff, equities could well find their rally legs again as we head into the New Year.

Back in the here and now though, with earnings season largely completed it is fair to say that much is left to be desired. However, we believe that the corporate sector can pick up relatively quickly should confidence increase and an agreement on the fiscal cliff could go a long way toward achieving that.

Beyond earnings though, recent economic data indicated that the consumer is holding up relatively well with consumer spending resuming an uptrend fuelled by lower energy costs and an improving housing market. Also, while the US job market remains sluggish, modest improvement continues which will further contribute to boosting consumer spending, the backbone of the US economy. Furthermore, following the summer slowdown, the Institute for Supply Management (ISM)

Manufacturing Index marked the second straight month in territory depicting expansion. Meanwhile, the much bigger service side continues to grow as the ISM Non- Manufacturing Index posted a reading slightly down from the previous month but still well into territory depicting growth.

Following Hurricane Sandy, the data may become harder to read over the coming months. Reports will initially be impacted by the disruption and damage done to the north east of the country, but data is then likely to be bolstered as the reconstruction and recovery begins. Netting it out, we believe the overall impact of the storms will be slightly negative to the economy as replacing structures that previously existed does not do much to improve productivity and occupies resources that could have been

utilised for more economy- enhancing purposes.

The US is certainly not alone as

developed economies globally continue to struggle to contain

fiscal spending and government debt

The anticipated murky data over the coming months only adds to the challenges facing the Federal Reserve as it watches

closely the

progression of the fiscal cliff negotiations. If no agreement is reached over how to resolve the approaching cliff, the Fed may feel forced to implement further programmes of easing to offer continued support

to the housing market and in turn bring down the unemployment rate.

The US is certainly not alone as developed economies globally continue to struggle to contain fiscal spending and government debt, which is resulting in bumpy and uneven growth and a below average global output. Economic divergences do remain though with the US economy featuring as a relatively bright spot as the Eurozone experiences a

renewed weakening.

However, despite the resolution to the US election, uncertainty still remains as the fiscal cliff looms ever closer and while we, along with the wider business world will be watching the negotiations very closely, we urge investors to take a long term perspective, especially during this time of elevated uncertainty.

Kully Samra, UK Branch Director, Charles Schwab