After the resolution of the “fiscal cliff” issue around year-end, investors seem to have had a change of heart. Bond mutual funds had taken in more new investor money than stock funds in 56 out of 60 months since the recession began in late 2007. However, in the first week of 2013, stock funds took in six times their entire net gain from all of last year. One analyst identified it as the fourth largest weekly influx ever.

Very little has changed on the economics front, suggesting that improving investor sentiment is a matter of perception more than reality. Retail sales grew in December at about the same solid rate as recent months. Automobile sales were even stronger. Consumer confidence had been trending sharply lower in December, inspired by daily panic in the media related to the fiscal cliff. We watch what people do with their money, rather than what they tell a pollster.

Personal income grew solidly in November, the most recent month for which we have statistics. Some of the growth reflected a rebound from October figures that grew at a slower pace due to the impact of Superstorm Sandy. Personal spending has been on a steady uptrend, interrupted by Sandy in October.

The number of new jobs continues to edge up at a moderate rate, but consistently. The unemployment rate remains too high even though it is gradually descending. Raises have been approximating the rate of inflation, so increases in consumer spending are dependent on employment growth.

Measures of the factory sector continue their uneven trend. Overall industrial production grew in December. This, too, followed an October-November pattern that was rendered indiscernible by Sandy. The Purchasing Managers Index of industrial sentiment returned to a growth trend in December, but remained within the recent up-and-down range.

Lower gasoline prices are keeping inflation tame and also have an economic impact similar to a tax cut. The timing of this is quite important as tax increases and the end of the temporary Social Security tax reduction take a bite out of purchasing power in January. Inflation was flat in December, and up just 0.1% (not annualized) excluding food and energy costs. Throughout 2012, inflation was just 1.7%, 1.9% excluding food and energy.

Overseas economies remain generally depressed. Much of Europe remains in recession, and even stalwart Germany is experiencing a noticeable decline in industrial production. The number of unemployed in the 17-nation euro-zone reached a record high in November, the most recent month for which statistics are available. European retail sales rose slightly in November, but were down 2.6% from a year earlier.

China has shown signs of economic resurgence after many months of decelerating growth. A survey of the Chinese factory sector registered improvement for the second consecutive month, and stands at the highest rate in over a year and a half.

Improvement in the housing and automobile sectors and steady growth elsewhere in the U.S. economy suggest better days ahead. American factories should remain busy supplying consumer demand and perhaps better demand overseas, particularly in China. We are hopeful that the anemic 1%-2% growth trends in Gross Domestic Product might improve to 2%-3% as 2013 unfolds. Expectations for the fourth quarter of 2012 and early 2013 should be more modest, however.

For stock investors, improving investor sentiment may continue to fuel a bull market rally. There is a tremendous amount of money sitting on the sidelines looking to get into the game. This would be “The Great Rotation” back into stocks. Some degree of caution is warranted, however, since stock prices have already risen dramatically over the past seven months, even as growth in corporate profits has moderated. This means that bargains are harder to come by than they were last spring.