Investors around the globe are elated at the state of continued global equities performance. US-based indices continue to rise, reaching levels traders would have been ecstatic to reach by mid- 2013, let alone August, 2012. But a lot can happen in the final two quarters of the calendar year and the current equity-based euphoria may be short-lived. There is a lot more to global economic recovery than continued equities performance.

There are a number of issues plaguing US markets. Take, for example, the impending spending cuts and tax increases in an incredibly fragile economy. The non-partisan Congressional Budget Office this week anticipated amendments to the US tax and spending situation to decrease economic output by as much as 0.5%, alongside a US$1.1 trillion budget deficit, the fourth consecutive yearly deficit in excess of $1 trillion. This could be enough to tip the US economy back into recession. In light of this news, how worthy are the reports of a recovering US economy? While there is no shortage of encouraging data and renewed earnings expectations, there is one factor maintaining high spirits amongst US investors and which conversely neglects the underlying issues at hand: the forthcoming elections.

At a time when the Democrats and Republicans are vying for the trust of fragile voters, the last thing the government wants to do is present a lack of confidence, an air of financial mismanagement or hint at the idea of adjusted lifestyle changes for Americans. This simply doesn’t win votes.

The flow of foreclosed homes on to US markets has slowed and this has created a sense of ‘prosperity’ that US markets hasn’t experienced in years. This is ideal for the reigning Democratic leadership, who will portray a vastly improved economic environment. But don’t be fooled. Foreclosed homes are piling up and the US debt situation continues to spiral.

On the surface, American markets appear to be on the road to recovery:

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The US elections will likely spell the end of an exceptional few months for global markets. At current levels, the Dow Jones Industrial Average appears to be meeting several major points of resistance. It is still maintaining dizzying levels amid improved optimism and seems ignorant of the major issues plaguing the US economy.

It’s not all doom-and-gloom. The long-term investment horizon remains positive but 2013 may turn out to be the wake-up call US markets have to have.

Stay tuned,

Lachlan McPherson