In the run-up to the presidential election, the world’s largest economy has been mired in bipartisan politics, particularly with regard to deleveraging. Congress has made little progress towards solving the country’s massive debt burden as it waits to cast judgment on who will be the next "leader of the free world".The average fund in the IMA Global sector has 43.5 per cent allocated to North American equities while 40 per cent of UK dividends in the FTSE 100 are declared in US dollars, meaning UK investors cannot afford to ignore the potential impact of a US downturn on their portfolio.
Due to currency fluctuations, funds with holdings in blue chip giants such as BP, Shell, HSBC and AstraZeneca would fall in real terms.
The US economy remains one of the largest consumers of goods from emerging markets, meaning a decline in demand could also negatively impact growth in those economies.
Arguably more important than the casting of ballots is the rapid approach of the US fiscal cliff – the point at which a series of tax breaks will expire and automatic spending cuts will sweep in. Many experts believe this could threaten the green shoots of growth struggling to break through.
Professional investors seem to care little about whether a Democrat or Republican enters the Oval Office in November, although the differing policies of the candidates means opinions could become more polarised once the race is won.
The problem is that for three years Congress has shuffled its feet in coming to an agreement on a deficit reduction plan.
Now the US is hurtling toward a fiscal cliff at the start of 2013 that will see federal tax increases and spending cuts equivalent to roughly 5 per cent of GDP automatically come into play.
Policy changes to take effect January 2013
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Source: Congressional Budget Office
Fund managers have downplayed the impact of this breaking point, stressing that US companies have been stockpiling cash following the market collapse in 2008, meaning they represent more of a defensive play.
However, even the most cash-heavy firms will begin to feel the effects of stunted growth, which would be inevitable if the economy falls over the fiscal cliff.
The Congressional Budget Office (CBO) predicts the US deficit will shrink by $641bn in 2013, or 4 per cent of GDP.
"Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession," said the organisation.
It added that the tightening would cause a 0.5 per cent decline in GDP in the fourth quarter of this year and unemployment to rise to about 9 per cent by the second half of 2013.
Such a negative impact on growth will have an adverse effect on real incomes and supress consumer and discretionary spending.
Ian Kernohan, chief economist at Royal London Asset Management (RLAM), says the market is currently assuming there will be some kind of delay to the spending cuts and tax rises, which will take the US further away from the fiscal cliff.
However, because of the timing, Kernohan believes Congress will put off the decision until the 11th hour.
"I can’t remember a situation like this before when this many measures were coming up together," he said. "And in an election year, they have been putting off the conversation."
"If this was a normal year, they would have been dealing with this by now, but because it is an election year [Congress] doesn’t want to be seen as adversarial."
"The conversation isn’t happening because we don’t know who the president will be and don’t know what the impact on Congress will be."
Kernohan says that while the US economy has picked up slightly over the summer months, it is not in a particularly strong position as the fiscal cliff approaches.
"If all these measures went through, it would have a massive impact on growth and would no doubt tip the economy back into a recession," he finished.
Throughout the weekend, FE Trustnet will take a look at the impacts of the US election and impending fiscal cliff and how investors can prepare themselves for every eventual outcome.