What a difference a year can make! Remember the fiscal cliff? That was the crisis which, at the outset of 2013, threatened to derail the fledgling US economic recovery. At the same time, growth was slowing in China and Europe was still mired in an austerity-induced recession. Today, in contrast, we are in the midst of a synchronized global economic recovery and for most of the past year stock markets have rallied – strongly!

So to what can we attribute such a dramatic turn around? The answer is, quite simply, QE.  Quantitative easing is a form of monetary stimulus which central banks have employed periodically to keep interest rates low, and bolster confidence in the equity markets – all in an effort to keep the economic recovery on track. Last year, the Federal Reserve in the US decided to up the ante by instituting QE indefinitely.

Since early 2013, the Federal Reserve has been pumping billions of dollars into the financial system, some 85 billion worth, each and every month. It was a bold, and highly controversial move, but so far at least, the medicine seems to have worked.  Most global equity markets in 2013 delivered returns of 20% or more. In the US, the S&P 500 stock market index soared in value by more than 30%.

The story in the bond markets was altogether different. With the apparent success of QE came the expectation that the program would be scaled back earlier than anticipated, allowing interest rates to rise. As you all will remember, when interest rates go up, bonds go down. Most affected by rising interest rates are the traditional safe haven investments such as government bonds and investment grade corporate bonds. All these debt securities delivered their worst performance in more than a decade!

On the heels of such an exceptional year – exceptionally good for stocks and exceptionally poor for bonds –one can’t be faulted for wondering what 2014 has in store, particularly as the Federal Reserve moves to “taper” its stimulus program.

If what we witnessed this January is any indication, you may want to fasten your seat belts! There could be quite a bit of turbulence on the way. This kind of volatility, which is likely to affect both the stock and bond markets, is nonetheless a good thing (as long as it doesn’t get out of hand). Ultimately, we have to expect some disruptions as financial markets are gradually weaned off the monetary “drug” that is QE. This is the road back to normalcy.

Whereas stock values in 2013 were largely driven by liquidity, in 2014, these will have to start trading based on fundamentals. That is how it should be. It is also normal that interest rates should continue to rise as the economy steadily improves. Although rising rates will necessarily have a negative impact on bond values, this too is a good thing (within reasonable limits), as it is another indication of a strong economy.

So at this point in time, while the tapering of QE is likely to dominate financial news for the foreseeable future, it is the progress of global economic growth that investors like yourselves will want to watch. Fortunately, all signs point to accelerating global growth, led mostly by a much stronger economy in the US. (Warren Buffet did say: “Never bet against the USA!”)