Greek relief for now, but what about the US?

To be sure, the current soft patch may have further to run, causing consternation for investors. However, there are several reasons to believe the slow, grinding, fragile US recovery of the last few years will continue:

- Firstly, the Federal Reserve (Fed) is likely to respond with more monetary easing and already appears to be heading in this direction,

- Secondly, while recent data has been a bit soft there are three key positives for the US: housing seems to be gradually on the mend, which is good for economic activity and household wealth; the manufacturing sector is benefitting from a structural turnaround as companies are relocating production back to the US; the shale oil phenomenon is driving employment in the midwest and flooding the US with oil and gas, and

- Thirdly, the US normally needs some sort of shock to go into recession. So far, there is no sign of this, but beyond Europe, the biggest threat is the "fiscal cliff".

Fiscal cliff approaching

It's well known the US has a larger public debt problem than the eurozone in aggregate. However, it is able to get away with this as it is a strong fiscal union with plenty of credibility that it won't default - unlike peripheral eurozone countries.

Also, there is strong demand for US dollars and US bonds from countries such as China. In addition, the Fed has been a strong buyer of US bonds (now holding about 15 per cent of them).

In August 2011, ratings agency Standard and Poor's cut America's AAA rating to AA+, and warned the US risks another downgrade in 2014 if it doesn't bring its debt under better control. Other ratings agencies have the US on a negative outlook.

Basically, what the US needs is a long-term plan to reduce its budget deficit, by slowing growth in health and social security entitlements and reducing tax breaks. The trouble is that under current law, the fiscal cutback in 2013 will occur too quickly and threaten the economy.

The main measures that will result in the fiscal cliff from January are: the expiration of the Bush-era tax cuts on income, dividends and capital gains; the payroll tax cuts and extended unemployment benefits that were part of President Obama's stimulus measures; and cuts to Medicare and defence that flowed from last year's debt ceiling agreement.

Taken together, these plus other measures will result in a fiscal drag equal to 3.9 per cent of GDP in 2013. Of course, the actual economic impact may be less than this depending on so-called output multipliers.

However, with GDP growth running at an anaemic 2 per cent per annum, it may be enough to plunge the US economy into recession next year.

The US needs a plan to reduce its budget deficit over the long term, but this would see it reduce very quickly - from around 7.5 per cent of GDP for the federal budget deficit in 2012 to around 4 per cent of GDP in 2013.

The other problem is that the US debt ceiling will also be reached again late this year, although it's likely the US government will be able to survive into early next year. So, it is likely that any negotiation about reducing the fiscal cliff will also have to cover the debt ceiling.

Of course, memories are still fresh from the dysfunctional negotiations that occurred last year in terms of the debt ceiling. These dragged on until the last minute and ultimately saw the US lose its AAA sovereign rating from Standard and Poor's.

However, there are several points worth noting. Firstly, neither side of politics seems keen to do anything about the problem prior to the November elections.

Secondly, both sides understand that if they allow the economy to plunge into recession, the backlash from voters could be significant. Ultimately, therefore, a deal is likely to be done, albeit at the eleventh hour.

Thirdly, the "fiscal drag" is likely to be much less as some form of compromise is reached. Most scenarios see the drag being reduced to around 2 per cent of GDP, with the Bush-era tax cuts likely to be extended along with some other measures.

The smallest drag, of around 1.3 per cent of GDP, is likely to occur if the Republicans gain the presidency and both houses of Congress.

Since a Republican president wouldn't gain office until January, the US may initially fall off the fiscal cliff for a few days or weeks before current laws can be reversed. Either way, there could be a period of uncertainty for the US into year-end.

That said, investors are likely to take a view on the likely outcome in the run-up to the elections. Once the results are known, past experience suggests some form of deal will be reached and the debt ceiling will be extended.

It's also worth noting the Fed is more than aware of the fiscal cliff concerns. It may play a role in introducing more monetary easing over the next six months if the Fed comes to the view that the fiscal cliff or uncertainty around it will threaten the US economy.

Although the current soft patch in the US and fiscal cliff concerns may result in ongoing bouts of volatility, the US economy will continue to recover gradually.

Worries around Europe and the US mean investors remain caught between near-term uncertainty and risks, but good value in shares and the prospect of more policy stimulus. The latter would result in higher levels for shares by year-end.

For long-term investors, the current environment provides great opportunities.

For those who can't take a long-term perspective, our view remains that strategies around outcome-based investment approaches, or a focus on investment yield beyond the diminishing returns from bank deposits, are worth considering.