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Will the outlook for ASX 200 shares stay bullish?

Wax on.

Wax off.

These were Mr Miyagi’s daily instructions to his martial arts pupil Daniel in the 1984 film, The Karate Kid as he applied, removed, and reapplied wax to an antique car.

The exercise in discipline was as tedious for Daniel as parts of the film were for many viewers. (Apologies if you’re a Karate Kid fan.)

But it came to mind this morning when an all too familiar pattern from the past weeks repeated once again. And like the Hollywood movie, this one also stems from the United States.

Stimulus on.

Stimulus off.

With each positive signal on a new multi-trillion-dollar US stimulus package, traders drive US share markets higher. And the share prices of ASX 200 companies tend to follow.

Then it all goes into reverse when negotiations hit a new snag and rumours spread that the stimulus is off.

Yesterday, overnight Aussie time, it was once again ‘stimulus on’.

US Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi hinted they hope to reach an agreement next Tuesday. While any agreement still needs to pass the more fiscally conservative Republican dominated Senate, President Donald Trump now says he’ll support a spending package in excess of US$2.2 trillion (AU$3.1 trillion).

As we’ve come to expect, this news saw all the major US indices close in the green, with the S&P 500 Index (INDEXSP: .INX) gaining 0.5%.

As we’ve also come to expect, this morning we were greeted by headlines like this one from the Sydney Morning Herald, ‘ASX set for gains as Wall Street jumps on stimulus deal’.

And indeed, the S&P/ASX 200 Index (ASX: XJO) is up 0.1% in late morning trading.

But here’s the important takeaway.

In my opinion, it doesn’t matter.

Ignore this noise

Sure it’s nice when shares on the ASX 200 move higher on any given day.

But as I’ve written before, and will surely write again, unless you’re a trader hoping to make gains from daily share price swings, you’re better off keeping your eyes on the horizon rather than these sorts of daily market moving news bites.

In the case of the next major round of US stimulus spending, it will come. The only question is when.

Personally, I believe it will still come before the 3 November election. Not because the Democrats are eager to throw Trump a bone. But because if Trump loses, I believe he might stonewall any new stimulus package, preferring to hand over an ailing economy to Joe Biden and team.

So both sides have an incentive to get new spending measures passed.

But that’s just my forecast. I could very well be wrong. And that’s just fine.

As a long-term investor it doesn’t much matter if a $3 trillion US stimulus package gets passed tomorrow, or mid-November, or not until next February.

Whenever it does get the green light, US and Australian share markets will benefit.

It’s the same the world over

The Australian Government’s own massive fiscal stimulus spending alongside the Reserve Bank of Australia’s (RBA) accommodative monetary policies effectively lifted consumer and business confidence in the wake of the coronavirus pandemic. Investors’ revived animal spirits have seen the ASX 200 rocket 37% higher since the 23 March trough.

The same is true for most major European indexes.

The EURO STOXX 50 (INDEXSTOXX: SX5E) reached its low on 18 March. Fuelled by unprecedented actions from the European Central Bank (ECB) and government stimulus packages, it’s up 35% since then.

And with a heavy second wave of infections sweeping the European continent, more stimulus is almost certainly coming. (Just don’t worry about when!)

Addressing France’s Le Monde earlier this week, ECB President Christine Lagarde said, “The options in our toolbox have not been exhausted. If more has to be done, we will do more.”

That sentiment isn’t lost on Aaron Barnfather, European equities portfolio manager at Lazard Asset Management in London.

As reported by the Australian Financial Review (AFR) Barnfather said:

Effectively the worse that COVID gets, the more that monetary policy is stepped up and the more fiscal policy is also ramped up as well. That is clearly good for equity markets. When you see lockdowns, you should effectively face into it rather than run away from it.

Scott Haslem, the chief investment officer at Crestone Wealth Management, also points to additional monetary and fiscal stimulus as one of the reasons ASX shares can outperform.

Writing in the AFR, Haslem points out:

Australia has just unleashed another wave of fiscal support, with tax cuts hitting peoples’ bank accounts over coming weeks, and various stimulus packages promoting capex and housing incentives… The additional 4 per cent growth stimulus over the next couple of years takes our total fiscal stimulus to 17 per cent, one of the highest in the world.

Just like the US Federal Reserve, it seems that the RBA is of the view that the risks of policy intervention are asymmetric, with the risks of doing nothing outweighing the risks of doing what little remains.

The RBA meets in less than 2 weeks, on 3 November.

The US presidential election and Melbourne Cup Day, both on the same day, may garner more headlines. But the RBA’s decisions on a slender 0.15% rate cut and, more importantly, on expanding its quantitative easing QE program will be eagerly watched by ASX share investors.

I’ll be watching as well. But as a long-term investor, I’ll keep focused on where I believe ASX 200 share prices will be in 2023, rather than next month.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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