US provides hopeful backdrop for shares ANYONE trying to predict the broad trends for our investment markets and economy should heed three key rules of forecasting. Rule one is be modest. So many things about the future are unknowable. For investors, sensible diversification and risk management are as important as taking a view on the investment outlook. Second, recognise the dominant role of overseas influences on most aspects of our markets and economy. Indeed, the leads from abroad on our shares, bond yields, commercial property and overall economy have strengthened over time. But our cash rate and Australian house prices are mainly shaped by domestic influences. Third, the major country (or countries) most relevant to us depends on what's being forecast. Our sharemarket closely tracks the ups and downs of US shares. Interest rates on medium-dated and long-dated government bonds are strongly influenced by US yields. The value of the Australian dollar is much affected by what's happening in China (particularly to expected economic growth in that country) and the US (especially to any changes in sentiment towards the US dollar). And China is the main driving force these days on our economy and commodity prices. The close relationship between US and Australian shares is illustrated in the graph. The graph is drawn in local currency terms; measured in one currency, the fit is even tighter. Both the direction our market follows and the timing and extent of wobbles closely follow the US lead. And that's despite the pronounced differences in the size and structure of the two economies and the timing of economic cycles. Of course, we are not alone in this. As Ashley Owen of Philo Capital points out, what happens in the US echoes around the world. Global markets increasingly move in lock-step and the US is the leader. Even when major news comes out of Europe or the Middle East, markets increasingly follow the US reaction to the news rather than the news itself. The US sharemarket has risen strongly in recent years. Indeed, it's doubled from its low point in March 2009 and is a third higher since the start of last year. On average, US share price gains have outstripped growth in profits; as a result, the average price-earnings ratio has risen to about 14.5 times the consensus forecasts for profits (which include expectations for double-digit growth in 2013 and 2014). However, investors in US shares still look favourably on dividends (which since the beginning of last year have moved up by a third, just as share prices have done) and on share buybacks. The US sharemarket would hit a rough patch were company profits to slump or were the US central bank (the Fed) to move too quickly in phasing down its huge program of bond purchases. Given that the US economy and banking system are in fairly good shape, and the Fed was given a clear reminder in May of market sensitivities to the pace at which it tapers bond purchases, these risks seem acceptable. While US shares could do with a period of consolidation or even some profit-taking, prospects are for further gains over the next 12 months. As a result, investors who expect the pulse of the US economy to speed up next year and that the Fed will gradually wind down its bond purchases seem likely to treat periods of market weakness as buying opportunities. This suggests, too, a generally favourable backdrop for our sharemarket. Whether we go all the way with the USA is moot: earnings here are softer, our range of listed companies is narrower and we lack the stunning technology stocks the US possesses. Much will depend on what happens to the Australian dollar.