US payroll employment report was unquestionably solid as the decline in government payrolls was overwhelmed by a strong increase in private employment. However, the biggest issue for the US remains the impaired housing market which is also coincidentally one of the most seasonal pieces of GDP. As a result, some are guessing that if the Fed were to initiate an additional round of easing (ala QE3), as alluded to in the recent FOMC statement or a fiscal-policy program like mortgage refinancing, it needs to happen soon. In addition, an almost coordinated, massive global easing cycle appears to be unfolding as there have been over 80 policy initiatives and 34 central bank rate cuts in the last 5 months. Perhaps that is why the markets continue to march higher despite what has been a very swift advance since October. If another round of QE were in the cards, it would most assuredly help stocks and commodity prices to rise as well.

US domestic stocks have now recovered most of the damage they incurred during the summer and third quarter of last year, putting the S&P within 1% of the level last seen on July 22, 2011. Looking at the week ahead, markets will initially be most focused on developments in Europe regarding Greece (seems like a broken record) as there is little in the way of fresh US economic news all week aside from the usual items of weekly jobless claims (Thursday). Markets will be interested in data Friday as international trade and consumer sentiment are reported. Perhaps the biggest risk to confidence at the moment, which seems almost surprisingly absent from the headlines, is the rising tensions between Israel and Iran. Should that situation continue to deteriorate, it could have meaningful impact on the stability of the middle-east region and start to have dramatic influence on energy prices which would likely rattle the markets.

Despite the improvement in the stock market and a better tone among the economic data over the last several months, there is evidence that the US strong-patch is losing steam; or at least not as strong as initially estimated. Aside from solid news that durable goods orders were up 3% in December and consumer confidence continues to rise, we received the first estimate of 4Q GDP on Friday. The major headline being reported is that 4Q growth of +2.8% was the fastest rate in 18 months; however it was not as strong as the consensus of economist estimates (+3.1%). Meantime, corporate profits being reported for the 4Q period just ended are also less robust than previous quarters. More and more companies are missing earnings estimates. To be certain, many of these earnings estimates were probably too optimistic but it is really the first quarter since mid-2009 that the pace of positive earnings surprises is slowing.

Entering February, stocks are up sharply from their early 4Q lows (set on October 3); many of our stock mutual funds are up more than +20% in that span of time. We have been encouraged by the rebound; but remain cautious in the shortest of terms that a mild correction is needed. This week we get updates on personal income, consumer confidence and employment. The key focus will be the three employment-related news releases scheduled this week. They have the potential to reinforce the recent bout of better sentiment, or could be the start of a growth worry similar to spring 2011. Despite near-term caution, we do believe 2012 can be a very attractive year for long-term investors as most experts see stocks as the best value opportunity over a multi-year timeframe and believe bonds are expensive.

Among the data in the US showing a strong patch in the economy, initial jobless claims continue to rest near multi-year lows and there are a number of signs showing that the manufacturing sector continues to showcase strength including recent surveys as well as headlines of various companies shifting production over to US. Meanwhile housing, a historically key part of the US economy, continues to report a mixed bag of news. But, at least the sector appears to be holding steady and no longer a drag upon economic growth. Perhaps the biggest worry remains European economic growth in the face of calls for austerity and fiscal responsibility in the region. This worry is also trickling over to China, where fears of a hard landing have been getting more discussed in recent weeks.

Indeed, market movement both in the US, Europe and especially emerging markets over the past several weeks has been encouraging and we are hopeful for attractive investment performance in 2012. Concerns do remain in the short-term and the news cycle has almost seemed too positive compared to what we became accustomed to during 2011. We believe that the markets have improved dramatically since last fall but a pause or correction is very likely in the near term if for no other reason than the markets have run quite a long way in a short period of time. This week, markets will be focused most keenly on the upcoming Fed meeting announcement Wednesday. While no change is expected in short-term interest rates for at least the rest of 2012, markets will be interested in the statement and growth forecast for clues about growth ahead. We will also get the first estimate of 4Q GDP on Friday; economists are projecting real growth of +3.1% on average which would be a notable uptick from the experience of any quarter in 2010 and 2011.

Over the past six weeks, the S&P (domestic) has rallied +11% approaching highs last July while the Euro has declined -5%. Additionally, US bond yields have also continued declining, suggesting that while the risk-on trade (stocks) is currently performing handsomely, investors are still residing in the perceived risk-off safety of US government bonds. This apparent disconnect cannot continue indefinitely; either treasury yields must begin to rise as investors feel compelled by the better prospects of earning positive real returns, or the stock market rally will stall/reverse course. Unfortunately, most probably believe that the next move for the US economy is down rather than up given the tremendous headwinds of Euro recession and political issues in the US. Additionally, the bond market traditionally has a better record of being right than stocks.

We are encouraged by the relative strength in the US but are cautious on the recent stock market rally sustainability. However, we do suspect that after some near-term correction, the market experience could be quite positive for the 2H of 2012. Over the long-term, there is no question in our mind that equities offer investors superior real-return potential to currently expensive bonds. In the shorter term, markets will remain most keenly focused on economic indicators such as job creation, consumer confidence & retail sales, as well we stability in housing prices (albeit at a low level). This week, shortened by the Dr. Martin Luther King Jr holiday, we receive update on manufacturing activity, price stability (consumer and producer prices) as well as several housing market indicators. Of course weekly jobless claims will also be important and investors will want to see new claims remain below 400k.

While the US experiences a strong patch, parts of Europe remain in dire economic situation. Borrowing costs continue to be stubbornly high for countries at the center of focus such as Italy and Spain. Also reported last week was data out of Spain that clearly suggests the economy is entering recession. A key question lingering in the minds of most investors is whether the US can continue to shrug off a sluggish European economy (as evidenced by a sharply depreciated Euro currency in recent weeks); or, will it ultimately be affected as well. An increasing number of investors seem to believe decoupling can occur and that the US can continue on without being sucked into the Euro black hole of unsustainable debt and slowing economic growth.

Coming this week is our 4Q edition of Nvest Nsights. As we look for clues about 2012, we are most struck by how discouraging returns have been for the average retail investor over the last several years. 2011 was best characterized by rolling worries related to Eurozone and politics which stimulated high volatility. That volatility created much anxiety and produced negative returns for most, leaving some to question whether investing is worth the stress. While we greatly relate to the feelings, we do believe that in an era of zero interest rates offered on bonds and cash, stocks (with dividends and earnings growth potential) offer the best real return opportunity over the next decade and long-term despite the lingering issues and worries. In the short-term, we think it likely that political (and thus stock market) volatility remains; but expect the market will vote ahead of the November elections and offer investors a more attractive 2012. We encourage you to read the newsletter as it is published later this week.

2011 was a year in which investors may conclude that investing in stocks is not worth the risk. After all, US government bonds were by far the best investment during the year even in spite of suffering a credit-ratings downgrade by Standard and Poors. Still, they may conclude that guaranteed negative real returns (returns after inflation) are better than the potential for larger absolute short-term losses in risky asset classes such as stocks. Key principles to successful long-term investing, such as diversification and efficient markets, were again tossed to the wayside as all risky assets traded similarly and diversification efforts hindered performance.

As we enter 2012, we suspect that the markets will continue to feel most uncertain through much of the first half of the year. Political uncertainty/indecision both in the US and Europe over how to deal with sluggish economies and too-great sovereign debt will weigh upon stock market returns. A US election year is sure to keep political uncertainty high. Further, despite recently stronger economic data in the US and apparent resilience, it is difficult to envision how our domestic economy can continue to completely ignore the slowdown being experienced in Europe and emerging markets. We believe it will be important for investors to get paid while they wait but be cautious not to invest with a bias toward recent experience. Focus on yield-paying stocks is an emphasis for our client portfolios entering a new year. And, after another extremely strong showing for US treasuries, we still believe that despite the uncertain economic and political environment, equities are the best investment opportunity over a longer time horizon (multi-year horizon).

Ultimately, 2011 has been a year defined by political uncertainty. In the US, budgets, deficits and too much regulation have kept consumers and businesses concerned and conservative with cash. In Europe, a very apparent lack of unity among EU members despite common currency has troubled investors and dramatically increased borrowing costs for the weakest sovereigns. Unfortunately, these headwinds do not appear likely to subside as we enter 2012. All things considered, it almost feels like a victory that investors are emerging from the battle in 2011 with only slight losses. Reflecting, we witnessed overthrow of governments (Libya), one of the most devastating earthquakes in history (Japan), a nuclear crisis, European sovereign debt worries, budget impasse and a ratings downgrade of the worlds risk free asset class: US Treasuries. All put pressure on risk investments; no wonder investor confidence has been shaken.

With less than 10 trading days remaining in the current year, we would not be surprised if markets remained virtually flat or slightly higher due to seasonal experience (Santa Claus rally typically occurs during December). But, there are few upcoming events or economic releases that have much power to spark a wave of investor enthusiasm that is more lasting. Haggling in Washington over several key issues including extension of the payroll tax cut extension keeps uncertainty in focus. Against the backdrop of a struggling euro economy, all roads continue to point toward more QE, especially in Europe and China. If QE ultimately comes to fruition, recall the reaction of stocks in August 2010 the safety of bonds or money market funds will not enjoy the updraft provided by additional money entering the system. Further, the US is likely to remain viewed as the best and safest house for risk investment in a bad neighborhood of choices, especially if improvement in jobs data continues its recently better track.

We wish you happy holidays, and a healthy, prosperous new year!

Also encouraging last week was indication that German economic activity is better than previously feared, suggesting that the European economic growth engine is still OK for now. Meanwhile, moves of economic accommodation and promoting of growth continue to occur around the world. China recently moved toward easing as inflation measures in the country slow and provide cover for more accommodative monetary policy. Additionally, the BoE maintained an easy stance and the ECB continues to appear determined to avoid another Lehman Brothers liquidity crisis. At the moment, all roads appear to lead toward more quantitative easing (printing money) to deal with paying off their too high debt. If that is the case, and a global emphasis on QE does develop, it suggests stocks are a better place to be over the intermediate to long-term.

While the European summit that concluded on Friday produced as much as could have reasonably been expected and was enough to calm markets, it still does not entirely solve the issues of too much debt. Unfortunately, that solution is much more difficult to come by and will likely continue to put pressure on markets in the first half of 2012 as a slow growth environment is again feared to be slipping toward stagnation in the face of calls for fiscal austerity. However, as we look toward the remaining weeks of 2011, we would not be surprised to see stocks continue to melt higher as December is historically a very strong month. This week, investors will be most keenly watching retail sales, the Fed statement (tomorrow) jobless claims and the CPI.

We are encouraged that policymakers around the globe remain intent on showing support for the world financial system. The coordinated moves last week should be viewed as a message that central bankers will continue to do everything within their power to prevent a liquidity crisis or run on the banks similar to what we observed at the depths of the financial crisis in late-2008 and early 09. However, the actions also raise our eyebrows a bit from the standpoint that the move was very bold; what do policymakers see/know that we dont? Is a major shock to the financial system looming around the corner? Is a forest fire is burning in the distance? Is the issue of too much European sovereign debt a bigger issue than most believe, warranting a more coordinated response than seen heretofore? We hope not, but it is a question worth considering as the major issues in Europe (too much debt in countries like Greece, Italy and Spain; rising interest rates; etc.) have yet to be sufficiently addressed and dealt with. Our view remains that any solution shy of a Eurobond (debt issued by a European central bank similar to the US treasury) fails to address the key issues and talk of such a solution is only just beginning.

Back at home, US markets were greeted with cheer to begin December as economic data continued its better than expected tone. The most notable headline of the week was that the unemployment rate dropped to its lowest level in almost 3 years, falling sharply from 9.0% to 8.6%. 140,000 jobs were added during the month of November and prior month job gains were revised significantly higher as well. Stronger than anticipated employment is encouraging from the standpoint that it suggests businesses are not laying people off despite an uncertain market and economic environment. Further, improving employment should be a boost to consumer confidence and could be a catalyst for commencing a positive feedback loop (wherein demand creates jobs, jobs create confidence, confidence spurs more consumption/spending etc). However, while the US data remains resilient, Eurozone economic data is weakening. A key worry emerging will be how strong can the US economy get or remain if other region economies in what is truly a global economy are weakening or entering recession? In that vein, it will be important to watch for continued action of central banks aimed at accommodating growth, perhaps at the expense of rising inflation. December is historically a strong month for stocks. As we enter a new year, we remain guarded as too-high debt in various countries including the US will remain a keen focus and market vigilantes appear short on patience.

Since October 26, US stocks have declined by more than 8%, erasing more than half of the gains experienced last month. There are several macro issues contributing to this worry and market decline including 1) US fiscal drag following super-committee failure last week, 2) euro contagion, 3) elevated oil prices despite global economic sluggishness, and 4) China. All of those big items have kept equity markets in a volatile trading range, ebbing and flowing in tandem with headlines of the day. As it has been for much of the year, the biggest focus at the moment is on Europe, which appears once again near breaking point. Slowing economic growth across the region coupled with rising interest expenses due to relentless bond market vigilantes is making for a very complex situation; one that will probably require the issuance of a common Eurobond debt. However, in recent days, there have been an increasing number of comments made suggesting the Eurobond concept is gaining some traction and increasing acceptance among key policymakers. Today, Euro-area leaders are again convening to try and bandage the situation but a Eurobond is probably not part of the discussion. These are developments worth following closely.

Aside from the seemingly indefinite Euro-region woes, we are now quickly approaching two of the best months of the year for US equities: December and January. It should be noted that holiday shopping and enthusiasm often help propel the markets higher into year-end. Perhaps in part, US stocks are opening significantly higher due to the better than expected start to Christmas shopping this past weekend. Additionally, while economies are running at a sluggish pace, monetary policymakers remain intent on accommodating growth and all roads appear to lead toward more QE. This will probably be seen first in Europe; it would take an appreciable weakening of US economic indicators for our monetary officials to commence another round of injecting money into the system. For the moment, the US appears to remain the best house in a bad neighborhood.