This year may finally turn out to be the one where “pessimism” finally gives way to “optimism” for investors. This is certainly a much more welcome emotion than the 2008 feeling of “depression” but still a distance away from “euphoria” that typically signals a market top (see diagram at the bottom of the page). Confirming this sentiment, consider the price to earnings (P/E) of the U.S. stock market. At just below 14 times forward earnings, one could argue that it is neither too expensive nor cheap. In fact, it leaves plenty of room for a multiple expansion, brininging along with the excitement and thrill that investors will receive if it occurs. Perhaps it will generate enough buzz to finally convince investors to move out of their low-interest cash accounts or rotate out of some bond holdings and into stocks once again. In our view, this is quite a realistic possibility in 2013.

It’s a toss-up. Whether you are debating who will win the U.S. Presidential election in November; or if Federal Chairman Bernanke will provide more economic stimulus with Quantitative Easing Three (QE3); or if the “Fiscal Cliff” of tax cut expirations and mandatory budget cuts will take effect beginning January 2013; or exactly how the European Central Bank will fix the Eurozone debt problems, it’s all a toss-up.

What’s all the Fuss about Europe? As troubled as the U.S. economy has been during the last few years, Europe’s current difficulties may be even more challenging. You may be wondering why the European nations are in worse financial shape than America, considering that we all face severe debt issues. American and Europe owe too much and don’t have enough income coming in to pay what we owe. Naturally, the common goal is to reduce debt levels or, as it is more commonly referred to, “deleverage.” And how does a country deleverage?

The 4th quarter of 2011 proved to be a relief for the US markets after double-digit losses occurred in the 3rd quarter. However, the European debt crisis continued to subdue most of the appreciation of stock prices of companies located outside of the United States. Overall, 2011 was a difficult year to be a globally diversified investor.

As we head into Thanksgiving, US Economic reports have been favorable. Over 70% of the S&P 500 (an index that tracks 500 US companies) beat expectations. Unemployment reports have been marginally better, yet Europe continues to cast dark clouds above the financial markets.

Playing “Chicken” As the debt ceiling debate roars on and the markets continue to trade violently from head line to head line, I can’t remember another time that I have noticed such a blatant display of “politics as usual” from our government officials. As renowned money manager John Thomas points out, “The debt ceiling has never been used this way. They are taking a normal housekeeping matter and turning it into a political weapon.” A high stakes game of “chicken” in an attempt to gain a political edge during the 2012 election with the United States AAA rating at risk.

The old adage of selling off your stocks in May and going away until Halloween is appearing to be a pretty good investment strategy so far in 2011. The first 4 months of equity gains are beginning to be challenged as volatility begins to increase. The markets are getting nervous about the global debt problems experienced world wide and next month the US economy will finally attempt to walk on its own with out the monetary crutches of the Federal Reserve as the latest round of $600 billion of Quantitative Easing II (QEII) ends.

Climbing the Wall of Worry It’s really quite remarkable how quickly the stock market shrugged off the terrible tragedy in Japan, the unrest in the Middle East and North Africa, the rising price of oil and other commodities, and the continuing sovereign debt problems in Europe. In the month of March the stock market only took about a week off it’s six month advance by dipping briefly into negative returns for 2011 and then gaining it all back in a week.

2010 is now history and it caps a wild three-year ride in the financial markets. We ended 2007 near all-time record highs in the U.S. stock market, but then the wheels fell off. In 2008, markets fell dramatically and the world economy nearly imploded. In 2009, we realized that the world was not going to end and markets began to recover. In 2010, matters started to stabilize and return to some level of “normalcy.”

Individual investors are having a hard time deciding if they want to be bullish or bearish on the stock market.  The American Association of Individual Investors is a non-profit association of 150,000 investors. Each week, the association compiles a sentiment survey of its members which measures the percentage of individual investors who are bullish, bearish, or neutral on the stock market for...