The US could surprise us again in 2012

The US has surprised everybody by being the best performing market of 2011. True, a drop of -3% is nothing to shout about, but it sure beats Japan (-15%), Europe (-16%), Germany and China (-20%) the Nordics, Russia and Brazil (-22%) and India (-35%).

The US has been resilient in the face of an onslaught from oil price spikes, Middle East unrest, the Japanese tsunami, European turmoil and Kim Kardashian. Whether it will survive President Newt remains to be seen.

Europe may be rudely hogging the headlines right now, but that will surely change as the US presidential election hots up before citizens cast their ballots on 6 November 2012.

Is now a good time to cast your vote in favour of the US economy?

President Feelgood

Election years have historically been good for US stocks, and global markets by extension. It's the first two years after a new president has been elected that you have to worry about.

In years one and two of a presidential term, stock markets have risen by 8% and 9% respectively, on average since 1926. In years three and four, they have returned 19.4% and 11%, according to stockbrokers Killik & Co.

In the first two years of a new presidency, markets have fallen 43% of the time. But in the final two years, they have been negative just 14% of the time. Why? Because presidents force through all their controversial and unpopular legislation in those early, heady years, before the other party seizes Congress in the mid-term elections and gridlock ensues.

All the populist stuff comes in the second half, as presidents do all they can to engineer the feelgood factor that comes with rising stock markets.

There is the odd notable exception to this rule, such as 2008. 2012 could easily be another one.

Fast and loose

So the electoral cycle is on your side, but what about the economic one? Markets were disappointed on Tuesday, when Federal Reserve chairman Ben Bernanke refused to drop any hints about further monetary stimulus.

US unemployment remains high and the property market remains depressed, but at least that means few people expect the Fed to hike interest rates until at least 2014, possibly longer.

Monetary policy looks set to remain ultra-loose, and household spending is beginning to recover. US GDP growth hit a welcome 2.5% on an annualised basis in the third quarter, suggesting there is life in the world's biggest economy yet.

The US will lag global growth in 2012 but will still be the fastest-growing Western market, Merrill Lynch predicts. The global economy is set to grow 3.7% in 2012, led by emerging markets, while US growth will improve slightly to 1.9%. That is still a lot faster than Canada, Europe, the UK and Japan, which will be lucky to notch 1%.

Cheap as fries

The BRICs spent much of 2011 hiking interest rates in a bid to stop their economies from blowing up, but they could start easing monetary policy next year, and that should boost US exporters.

Europe could be a major blight, however, especially since it accounts for 20% of sales by S&P 500 companies. I can't see Europe solving its problems any time soon, as EU politicians prefer to bicker and blame, and the US is unlikely to escape contagion.

That said, US corporate profits have held up strongly and valuations look reasonable, although there are cheaper markets elsewhere. The S&P 500 is now trading on a P/E of 13.9, according to Thomson Reuters. That compares to 10.4 in the UK, 7.8 in China and 5.8 in Russia.

Top for 2012

I've been writing several 2012 outlook pieces recently and the US regularly pops up as a top pick for the next 12 months. As ever, that worries me. I suspect there is a bit of 'recency bias' in this -- the US is doing well, surely it's got to continue? -- as well as a severe shortage of good stories elsewhere to impress investors.

But at least the US has plenty of positive data to hang the tale on.

Right up your street

I have been alerted to an interesting ETF investing in the US, the SPDR S&P US Dividend Aristocrats ETF, launched by State Street Global Advisers in October. This tracks the performance of the S&P High Yield Dividend Aristocrats Index, which contains the 60 highest-yielding members of the S&P Composite 1500 Index that have increased dividends every year for at least 25 consecutive years.

The performance of this index confirms everything the Fool has been saying about the long-term benefits of a progressive dividend policy. Since launch in 1999, it has generated a total return of 146%, while the S&P 500 has produced a negative total return of -2%.

US active fund managers have traditionally done an even worse job of trying to beat the index than UK managers. A low-cost ETF may be the way to go, and this is an interesting one.

New world, old dangers

Such is the malignant influence of Europe these days, the new-ish world will struggle to escape the old world. In a full-blown eurozone meltdown, US exceptionalism will be tested to destruction.

The grimly fascinating US electoral process should divert us from the eurozone fiasco, at least for a while. I still think Obama will hang on, but it will be close.

The fate of US stock markets will also be a close call.