YES Jason Hollands US Federal Reserve policy dominated markets in 2013: its asset purchase programme depressed bond yields, enticed investors into riskier assets, and helped supercharge returns on developed market equities. Now that tapering has begun, markets are at last set on a pathway towards normalisation. But it would be wrong to dismiss the ongoing importance of Fed decision-making during a year of transition, which could see further bond market volatility, rising yields and a strengthening dollar. While the US stock market has taken the onset of tapering in its stride so far, equity indices are at record levels. And on a cyclically adjusted basis, stocks look expensive. Yet the pace of the recovery is modest and real earnings growth is quite fragile. In recent years, much of the earnings growth of the S&P 500 has come from the benefit of ultra-low refinancing costs, not innovation or sales growth. With bond yields on the rise, earnings will need to start playing catch up with valuations. Jason Hollands is managing director of Bestinvest . NO Will Hobbs Many believe capital markets have been dancing to the tune of central bankers these last few years and that, as QE and other special monetary measures are withdrawn, stocks could reverse direction. But we have long believed the US economy is on a firmer footing than is generally realised, thanks in part to a consumer balance sheet that is marked by strength, not weakness. This underlying resilience has helped the private sector to grow at a 3 per cent annualised clip since the end of 2009, but it has been obscured at the aggregate GDP level by falling government spending. 2014, however, sees a much reduced government deficit and a less fractious political scene. US - and global - growth is likely to accelerate a little. Against this backdrop, central bankers will be the supporting actors, not the stars, on the global stage in 2014. It could be a bumpy ride if policy rates rise faster than expected, but overall, with stocks still not especially expensive, 2014 could be a solid year. Will Hobbs is an equity strategist at Barclays .
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