Better Than We Thought

So far this year, stocks are performing far better than one would have thought, myself included, given the explosive gains of 2013.

The Dow is the laggard, up a little more than seven percent, year-to-date, while the S&P 500, thus far is up about eleven percent, and other averages and sectors are performing even better.

While it was not what was expected, a well-positioned portfolio captured those gains thanks to the discipline associated with two simple stock market rules, developed by the late Marty Zweig ... "Don't Fight the Fed" and "Don't Fight the Tape."

Both have remained friendly to the market all year long and should have kept investors relatively fully invested, even during times when the market appeared to be on the verge of breaking down.

Of course, the year is not over yet and December may start on a disappointing note, but it's hard to argue to alter course at this point in the cycle.

Much of what has driven stocks higher, thus far in 2014, remains in place as we close out the calendar.

The Fed is friendly. The tape is tolerable. Oil prices have plunged, giving consumers of gasoline, heating oil and natural gas, a big tax cut as we enter, more deeply, the holiday shopping season.

Corporate profits are strong, cash balances are bulging, while lending standards are beginning to ease at the biggest banks ... offering hope that credit mat flow more easily to hungry home buyers who are eager to get into the market.

Employment is up, wages are beginning to rise and balance sheets at home, and in Washington, are looking far less levered than at the depths of the recession.

The World Ain't Our Oyster

The rest of the world doesn't look nearly as good. Manufacturing in China and the Eurozone continue to weaken. Japan's inflation is falling again, despite massive efforts to reflate its economy.

While some exposure to overseas markets may be warranted, where stimulus will play a major factor going forward, this is still Dorothy's market ... quite simply, "There's no place like home."

The US, thus far, has not been inclined to make major economic policy errors as the recovery continues to re-gain lost momentum. Certainly, much more can be done to repair critical infrastructure, from crumbling roads and bridges, to the nation's power grid, to replacing private plant and equipment, which is aging rapidly and limiting gains in domestic productivity.

However, the rest of the world is hardly outpacing the US on that score and, in fact, while some countries continue to underinvest in infrastructure, China has over invested so much, it could face a bust of historic proportions.

Recent reports suggest that China, by building massive, but still uninhabited cities (using the "if you build it, they will come" philosophy) has spent upwards of $6.8 trillion, over the last five years, on cities, like Ordos in inner Mongolia, which remain ghost towns still.

Unless those towns fill up and bustle with economic activity, China may have a "housing crisis" that will make our real estate bubble look look like a flea speck on an elephant.

Watching the World

While the US has managed to remain resilient in the face of global economic weakness, a looming oil price war with Saudi Arabia, which could adversely affect a booming energy industry here at home, and a host of geo-political challenges though out the year, it doesn't mean one should NOT pay attention to what's going on elsewhere.

It's true that the US has graduated from simply being the "best house in a bad neighborhood," to being, quite simply, the best house in any neighborhood. But one must remain on "neighborhood watch" to make sure we remain safe and secure.

I suspect the US will continue to make all the right moves, from a policy perspective, even in spite of the on-going gridlock in Washington.

There is no gridlock at the Fed, which is a comforting note going into a brand new year that may present some new and unexpected challenges.

However, the Fed has been vigilant and has been our friend. One suspects that there will be a constancy to Fed policy that continues to insulate the US economy from the worst of what's happening overseas, while helping to cement in place the continued foundations for secular, or long-term, domestic economic and market recovery.