The global economy

The worldwide wobble

The world economy will have a bumpy 2014. But the recovery is not, yet, at risk. 

For much of 2013 the world’s big stockmarkets had a magical quality about them. They soared upwards – America’s S&P 500 index rose by 30% last year, and Japan’s Nikkei by 57% – buoyed by monetary stimulus and growing optimism about global growth. Over the past month, the magic has abruptly worn off. More than $3 trillion has been wiped off global share prices since the start of January. The S&P 500 is down by almost 5%, the Nikkei by 14% and the MSCI emerging-market index by almost 9%.

That investors should lock in some profits after such a remarkable surge is hardly surprising. American share prices, in particular, were beginning to look too high: the S&P finished 2013 at a multiple of 25 times ten-year earnings, well above the historical average of 16. A few bits of poor economic news of late are scarcely grounds for panic. It is hard to see a compelling economic reason why one unexpectedly weak report on American manufacturing, for instance, should push Japan’s Nikkei down by more than 4% in a day. Far easier to explain the market gyrations as a necessary correction.

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