So, I’ve dug out the Windowlene and an old T-shirt. It’s time to give the crystal ball its annual polish before attempting to divine next year’s financial trends in its foggy innards. Its record isno better than a random spin of a roulette wheel, but the consultation ritual does lend its predictions a reassuring if spurious air of certainty.

There is nothing, of course, about the dawning of a new year that should influence economies and markets. The sentimental impact of a new leaf turned, and the more prosaic effect of tax year ends passing or approaching, are annual occurrences. As such, they are simply part of the financial rhythm, and not reasons in themselves to expect shifts in investor attitudes and asset prices.

The ritual of the new year prediction is another beat in the market rhythm and parallels the work of businessmen plotting corporate strategies and individuals planning their savings. All have objectives that stretch beyond 12 months, but the calendar year is a convenient yardstick against which to measure the success of their pursuit.

The flurry of forecasts about 2004 provides much reassurance that normal service has been resumed in the financial world after the traumas of the past four years. The perennial bears remain cautious it is true, dismissing the recovery in economies and share prices this year as an upward blip in a long down cycle. Much more significantly, the bulls have at last rediscovered their cojones. In particular, US investment strategists are churning out the upbeat analysis which has long been the hallmark of their trade.

This reawakened optimism is particularly noteworthy for having little foundation in the reality of equity market valuations. The best that can be said about share prices, on both sides of the Atlantic, is that they are fairly valued – against government bonds, their own history and future earnings and dividend prospects. For the bulls, though, this is now ground for arguing that prices are well supported by fundamentals. The facts constitute a floor, not a ceiling to 2004 returns.

Suppressing the thought that in a perfect market share prices should always appear fairly valued, it is particularly difficult this year to make a strong argument about valuations. The same is true of the state of the major economies. Indeed, the two problems are entwined.

Worst is over

Economies have seen the worst and are now in expansion phase. The relative speed with which each is growing can be seen to be a function inter alia of structural differences, government policy and currency movements. Government bond yields have risen to reflect the passing of the risk of recessions. Share prices have enjoyed actual profit recoveries and the anticipation of future profit growth.

However hard I stare into the fog of my crystal ball, it is impossible to see anything other than the current economic conjuncture. Today’s issues and opportunities will be tomorrow’s and the day after’s. What is clear, though, is that growth is the order of the day. Policy is set to nurture the recovery that is in train. Confi dence indicators suggest that businesses and consumers can be persuaded to buy into the process. Prepare, then, to be surprised on the upside. Low inflation and economic hiccups have ground down investors’ expectations. While on paper it seems they believe company profits will grow smartly, in practice they expect something much more anaemic. Over-optimism has hurt badly in the recent past.

Next year’s shock should be the rediscovery of all that is pleasurable about a bull market – positive earnings reports, M&A, strong flows into equity funds. In bull markets share prices rise and go on rising in the face of repeated evidence that they are up with events because the flow of good news keeps pushing investor horizons further out. In 2004 the flow of good news could come from the economy (growth but no inflation), the bond market (fewer rate rises than expected), policymakers (letting deficits run to curry electoral favour), as well as corporates themselves.

As ever, one must expect the unexpected. This, not surprisingly, is the area in which the crystal ball has most to say but least of value to contribute. This year, for what it’s worth, it foretells a takeover bid (successful this time) for the London Stock Exchange; plaudits for a snarling FSA spurred into action by new management eager to emulate Eliot Spitzer; the popularisation of hedge funds as they find their way into the investment mainstream; and the return of the hostile bid as the ultimate sign of capitalism’s rehabilitation.

Surprises, it will be clear, can be positive. On the negative tack, watch for signs that the “controlled” issues are getting out of hand. One thinks of the dollar’s decline, the terror threat, strong commodity prices, the US mutual fund scandal, and the upcoming election in the US. On these, though, the crystal ball is as relaxed as a pundit with a lousy forecasting record and poor alternative employment prospects can be.

Edmond Warner is chief executive of IFX Group

edmond.warner@guardian.co.uk