Can the good cheer last for investors?

The feel-good factor felt by stock-market investors in 2013 has left markets open to disappointment.

The year 2013 made the average investor "feel like a genius", says Jeff Sommer on You could just put your money in a stock index fund and watch it soar. America's S&P 500 index gained 30%, its best year since 1997. Japanese, European and British stocks rose by a respective 57%, 15% and 14%.

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The latest surge came when US Federal Reserve chairman Ben Bernanke announced that the US central bank would taper its quantitative-easing programme. It is trimming the monthly value of assets bought with printed money from $85bn to $75bn.

In May markets tanked when Bernanke raised the prospect of tapering but by late December they had got used to the idea. That's because investors have realised that "they will still be drinking from a nicely spiked punch bowl", as Edward Hadas puts it on Breakingviews.

Far from actually tightening monetary policy, as investors seemed to fear in the spring, by printing slightly less money each month the Fed is simply loosening less rapidly. What's more, Bernanke sweetened the pill by saying interest rates will stay low well past the point when unemployment has fallen to 6.5%. It is currently at 7%.

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So liquidity-addicted markets have been reassured that they will keep getting their fix. It also helps that US data have strengthened of late and look set to keep improving, especially now that a budget deal has reduced the threat of tight fiscal policy denting growth. Gradual recoveries elsewhere bode well too.

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But while this backdrop is encouraging for developed-world stocks, "share prices have run well ahead of trends in the economic data", says Ralph Atkins in the FT. And it's hard to see earnings posting a big leap next year, adds George Magnus of UBS, also in the FT. The West has yet fully to recover from the credit bust.

Europe's economy looks stagnant, while a consumption tax hike could temper growth in Japan. Weak corporate investment, poor demographics and rigid labour markets are other factors militating against a growth spurt. Rising long-term interest rates, in anticipation of eventual tightening, could well undermine growth, given the massive debt loads in Western economies.

All the good cheer unjustified by the fundamentals leaves markets especially vulnerable to jitters and setbacks. Last year "surprised even the bulls on the upside", says Randall W Forsyth in Barron's. Despite the apparently benign backdrop the path of least resistance still appears to be up could next year "be the flip side"?

Seven years after the global financial crisis began most developed economies are only slightly bigger, if at all, than they were in 2007, says The Economist. The US and Japan have made up the lost ground, but the eurozone and Britain haven't; our economy is still 2% below its pre-crisis peak. Emerging markets, especially China, have continued to soar. China's economy is around 70% bigger than it was in 2007.




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