Holiday Cheer: Is Market Optimist Justified?

12/16/13 9:59AM EST

Holiday Cheer Is Market Optimist Justified Holiday Cheer: Is Market Optimist Justified?

Image via Nabil Shahid/Shutterstock

As the world heads toward yet another Federal Reserve Open Market Meeting, investors appear to be pretty happy about the state of the world. Stock markets are suffering from taper tension, but us equities aren’t everything. The world’s financial markets are buoyant heading into Christmas. The question is whether that mood is justified.

The world certainly looks better than it did this time last year, but that isn’t saying much. There are still problems in Europe, American recovery is anemic, Asian economic engineering may yet bring disaster and many other emerging markets, most notably India and Brazil, are facing problems.

Financial Optimism At Year’s End

One of the clearest indications of the optimism among investors is the performance of gold. Gold ETFs, which allow quick and easy trading in the yellow metal, have seen massive outflows in recent months, and analysts are predicting sluggish gold prices in the year ahead. Inflation never arrived as a result of Federal Reserve policies. That was one of the major reasons for owning gold.

The central bank is not even able to keep inflation up to its own targets. That may be a big problem for the Us economy in the coming years as dollar deflation could set in, but right now it means that gold is a bad bet. With the bond buying program on the cusp of ending, inflation is distant, and investors are no longer hedging the risk as strongly.

Despite the nervousness of equity buyers in the couple of weeks leading into the open market meeting, the performance of the US equity market through 2013 has been phenomenal. Europe too appears to be ready to recover. Ireland became the first country to leave the EU/IMF bailout this week, and the other stricken countries appear to be performing better as the year closes.

Worries about China’s incoming demise have been tempered by faith in the country’s government and their great economic and social engineering programs. Japan’s programs of the same type have been lauded as great successes.

Stability May Be An Illusion

The world’s economic bliss rarely lasts all that long. Today’s situation is far away from utopian, and there are multiple problems on the horizon. China and Japan’s massive economic engineering may fail, emerging markets are looking less vibrant than they have in years, and Europe is still balanced on little more than tradition.

Financial optimist is a good thing for investors. It drives asset prices up and boosts returns. Any trader who played the US equities market in 2013 will attest to that fact. Optimism doesn’t last forever, however, and if the market is overvalued when optimism tapers a correction may be due.

Holiday cheer appears set to reign across the market through the end of the year, even if the Federal Reserve begins to taper its QE program. Just because the market is ruled by a mood doesn’t mean every investors should subjugate themselves to the same. The end of the year is a good time to reassess holdings. This Holiday season is time to take a break from optimism, if only for a day of rigorous analysis.