Many myths persist in the market. Some have a bit of truth, and that is enough to keep them around: “Don’t fight the Fed,” “Don’t fight the tape,” and “sell in May and go away.” Do we hang on to the latter because it rhymes, or because it works?

Of course, if one has a taxable account, one has to take into account capital gains taxes. The saying has some credence because historically stocks in May advance only 52 percent of the time, but – on average – 62 percent of the time in a month. Is this a year to sell in May? It doesn’t look like it.

After a strong start to the year, equities are up more than 18 percent year to date. For a time, stocks paused to let the economy catch up, but then resumed their upward trend. Earnings have been better than expected. About 70 percent of firms that have reported so far have beaten street estimates on income; only about 20 percent have failed to meet estimates.

However, revenue is another matter, as most firms have failed to meet their revenue targets and have signaled tough sledding ahead. Unemployment numbers remain persistently high, economic numbers remain weak, and gross domestic product growth is sluggish. The efforts of the Fed to jump-start the economy are having less and less impact. Sequestration has only begun to take effect.

Signs are mixed for the global economy. Europe remains troubled, but at the moment seems to be stabilizing. Headwinds persist, but the market is staying on its upward course with brief interruptions. Indeed, the surprising upward drift of the market in the face of persistent bad news may be one of its strengths. It is a rally that is widely disliked. Can the market continue its “melt up,” or should we be “selling everything that is not nailed down?” One prominent money manager has stated as much.

Apple was able to complete the biggest bond offering ever at exceptionally low rates in spite of a rating less than AAA. The offering was three times oversubscribed. Apple joined the ranks of another gilt edged company, IBM, in large debt offerings. Are these signs of a bubble in bonds, or is it a good thing for equities? After all, the offerings provide more capital for expansion and reduce the cost of debt for offering companies for a good long time.

In the case of Apple, they have effectively repatriated $15 billion in cash of the nearly $100 billion that they have earned overseas but cannot return to the U.S. because of taxes. In their case, they avoided $7 billion in U.S. taxes. This will give President Obama more ammunition for raising taxes, but because Apple plans to use the cash to pay dividends and buy back stock, the U.S. Treasury will receive back much, if not all, of the $7 billion tax savings from personal income taxes paid.

The debt offerings are a plus for the U.S. economy and the Treasury. Perhaps they will do what the Fed has been only marginally successful at doing: growing business. The total U.S. economy is growing at an anemic rate of approximately 2 percent, when we need and could be growing at 4 percent. We could be growing at a faster rate were it not for the uncertain economic policies flowing out of Washington. At a 4 percent GDP growth rate, unemployment would be much lower and tax revenues much higher.

We have several pluses in the economy. Interest rates are low. Energy prices are lower than they have been. Housing is recovering. Household debt is down, and household net worth is back to 2007 levels, fueling consumer spending. And yet economic growth is sluggish. It is not surprising that the market is higher, but it is surprising that it is doing so well in the face of the obstacles coming from the executive and legislative branches of the federal government.

What is an investor to do? As I have said often before in this column, the market climbs a wall of worry. Investors are still seeking yield, which explains how Cyprus was able to sell bonds at a time when their problems were being hailed as the end of the euro and the European Union. This scenario was reminiscent of the worries over Spain, Portugal, Italy and Greece. They each presaged disaster that did not strike. Each of these countries has seen their recent debt offerings well bid with lower interest rates. Along with the U.S., German markets are trading at all-time highs. Japanese markets are trading at five-year highs, as central banks lower interest rates. The European Union appears poised to remain intact.

We remain the best house in a bad neighborhood, so investors are still investing in U.S. equities. With economic growth expected to remain sluggish for years to come and interest rates low, perhaps this is the only place to invest for growth. I recommend that investors consult with a financial adviser about how to participate in the current market.

Meanwhile, 30-year Treasury bonds declined 3.1 percent for the first quarter, with the broader bond market declining 0.3 percent. In March, bonds declined 0.1 percent versus a return on equities of 3.75 percent. This is consistent with my previous admonition regarding bonds and the pressure they will be under as interest rates rise.

Previously I remarked that a movement from bonds to equities is expected as the Fed policies continue to favor equities. Investors have been forced to take more and more risk to find yield, and this will not end well. Bond exchange-traded funds are taking more risk; money market funds, normally thought to be a safe haven, are forced to take more risk.

The averages reached these new records in spite of year-end wrangling over the budget in Washington. First, the so-called “fiscal cliff” fixated the markets, but then came and went. Then sequestration loomed, and that was thought to mean the end of the rally. But the market just shrugged. Another crisis out of Europe was also dismissed.

About the only thing that seemed to give the market pause was our old friend Alan Greenspan. After 10 straight days of market increases, Greenspan took to the airwaves, and announced on March 15 on CNBC that the markets were undervalued; that was enough to halt this steaming locomotive in its tracks. The market dropped, breaking the 10 consecutive days of rally.

The contrast between the last market highs in 2007 and the present are large. There is actually less market strength today to back up the new highs than there was in 2007. At that time, unemployment was below 5 percent, the housing markets were strong but peaking, investor sentiment was positive, and the global economies were growing. Today, the market highs seem more to be the result of the Federal Reserve inducing global monetary easing. But compared to 2007, companies today have half the debt, pay bigger dividend yields and have 13 percent greater profits.

Many people have waited to “buy on the dip,” but that has only added strength to the market. In an average year, the market posts five corrections of 5 percent or more, so it would not be surprising to see a mild correction; however, with the amount of money on the sidelines, it should be shallow and short.

Perhaps these conflicting signals are the reason why contrasts can be observed. A senior analyst at a well-known securities firm forecasts that the S&P 500 will drop to 1,390 by the end of the year – an 11 percent drop from the close of the first quarter. But the chief equity strategist at the same firm sees the S&P at 1,525 to 1,575 by the end of the year, with a continuation of the current uptrend. He cites, for instance, the strength in the conference board leading indicators. If the same company cannot agree with in its own investment strategists, it is not surprising that investors are confused.

While I believe that most of the gains for the year are already on the books, there is still room for some growth between now and the end of the year. I expect some dips, but overall the trend should be up.

Extraneous events such as additional European crises and continued weakness in the European economy can cause uncertainty and upset. Our own government adds a high degree of uncertainty; the market abhors uncertainty. So overall, I see the market continuing to climb its “wall of worry” with occasional setbacks. Remain invested and diversified.

When the early returns of the Italian election for prime minister came in on Feb. 25, the markets took a steep dive. Voters were asked to prolong the policies of Mario Monti, prime minister since 2011.

Monti was considered a technocrat; he had led Italy into a policy of austerity. This financial approach was considered a road map for Spain, Portugal and perhaps France. Greece had already reluctantly stated down this path.

The Italian people were not happy with this austerity even though the financial markets, the Eurozone and the Euro had found comfort with this policy. Under Monti, Italian bonds found a bid, with lower interest rates, and the Eurozone had taken a respite from an extremely volatile period. Europe – Italy specifically – seemed on the mend.

The election featured an array of candidates, including a professional comedian and political buffoon, former Prime Minister Silvio Berlusconi. Already convicted of tax fraud, sentenced to four years in jail and under indictment for sex crimes involving minors, Berlusconi ran on a campaign of a repeal of austerity and Laissez les bons temps rouler (Let the good times roll). For instance, he pledged to return all property taxes paid in the prior year, among other giveaways.

Given the choice between austerity and good times, Italians chose “La Dolce Vita;” they tossed Monti, and placed Berlusconi in a position to win the prime minister’s job again. Bond markets and equity markets were shocked and tumbled. Investors, already discouraged by Europe, pulled to the sidelines and dumped stocks. The U.S. equity market suffered its biggest drop of the year, 216 points on the Dow. Bonds rallied.

There was good basis for investor concern, because not only did the Italian elections worry local markets, but Spain, Greece, Portugal and France also looked to be a greater risk. Eyes again turned to Germany, and to Angela Merkel specifically.

The Germans alone had previously stood fast and held the eurozone intact. France, though willing to help, no longer had the economic or political will. Others who might help did not have the economic heft of the Germans. Merkel held the key, and she had just suffered an embarrassing setback in state elections. It was not clear that her government was secure. No wonder the markets tanked.

However, a strange thing happened on the way to the theater. When investors surveyed the damage and sought refuge for their money, the U.S. looked attractive. Big enough to absorb large amounts of money and with fixed-income markets yielding tiny sums, U.S. equities looked good, and the next several days saw powerful rallies in the U.S. equity markets. The Dow recorded all-time highs, accompanied by Dow Transports with the S&P not far behind. The status of the U.S. as the best house in a bad neighborhood was confirmed.

The U.S. is no beauty. With unemployment still at high levels, a budget impasse and sequestration just around the corner, the U.S. was not very attractive – but it was still better than most. It was still a fixer-upper.

The statistics for the past 10 years in the U.S. have been overwhelmingly negative, except when compared with all the rest of the markets. According to Bloomberg Business week (Feb. 24), the median U.S. household lost 47 percent of its wealth from 2007 to 2010. Between 2001 and 2010, household wealth dropped from $90,500 to $57,000 – less than it was in 1983. Yet investors who had stayed the course from the March 2009 lows were now finding their portfolios repaired as U.S. markets marched toward all-time highs.

The Italian elections contained lessons for U.S. politicians in the face of sequestration (the chopping of expenditures for the U.S. budget), and an austerity program much like Europe. President Obama ran against just such a program in the last election when he pledged to raise taxes to preserve sacred programs. The Republicans ran a program of austerity, pledging cuts to the budget. In a precursor to the Italian elections, voters rejected the Republican approach and embraced the president’s approach.

We have now reached a stalemate in Washington, where the same policy battle is being fought. If the election results out of Italy are any indication, we know how the battle will turn out. Republicans have their supporters, but not enough to carry the day. President Obama appears to have the upper hand in the negotiations, so I do not anticipate any significant debt reduction. A stalemate may be the best that can be achieved. Indeed, as the deadline for sequestration passed, the parties agreed to a truce until November 2013, and stood down.

Fed Chairman Ben Bernanke, in two days in testimony before Congress, pled for politicians to get their fiscal house in order. But we know that is not going to happen. It is not clear what will break this impasse; however, until it is resolved, we will continue in this malaise. Now is a good time to remember that for generations, through difficult times and good, the U.S. economy has grown. Every tomorrow brought risk; yet the U.S. has prospered, just not at an even rate.

Left with the state of affairs in Europe and the U.S., investors can expect a continuing state of volatility. Indeed, the Volatility Index has hit highs for the year after being somnolent for some time. For the time being, investors should stay invested in solid, proven companies with good earnings and prospects for a decent dividend. It will be a bumpy ride.

In response, the Federal Reserve said:

Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather related disruptions and other transitory factors. Employment has continued to expand at a moderate pace, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement. Inflation has been running somewhat below the committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability. The committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate. Although strains in global financial markets have eased somewhat, the committee continues to see downside risks to the economic outlook. The committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer term Treasury securities at a pace of $45 billion per month. The committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

“The committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the committee will continue its purchases of Treasury and agency mortgage backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace and composition of its asset purchases, the committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.”

Political problems and financial strain in Washington continued. The European debt crisis subsided, but is not over. Nevertheless, with ample negatives to slow the market, equities rose. China engineered a soft landing after massive government support, and Japan started its own quantitative easing program.

A change in investor sentiment brought about the rally in U.S. equities. In December 2012, investors pulled a net $30.47 billion from stock funds, the most since July 2011 and the sixth highest withdrawal since that number has been tracked beginning in 1984. However, in January 2013 that trend reversed and Trim Tabs estimates $42.8 billion went into equity funds through Jan. 29. What happened to cause this change in sentiment? With gains very hard to come by in nearly every sector, equities began to look more appealing. The money being invested into stock funds has not come from bond funds, as many had predicted. In fact, bond funds had $41 billion in inflows in January, according to Strategic Insight, much higher than the $27 billion averaged monthly last year. Apparently, investors still like bonds.

Indeed, the big loser in this rotation appears to be banks. More than $114 billion was pulled out of bank deposits the first week of the year, the biggest single week of withdrawals since 9/11, according to Bloomberg. Also, $30 billion more was withdrawn from retail money market accounts in January, according to the Investment Company Institute. People are getting tired of earning zero on their cash.

The change in attitude toward stock funds has been attributed to a number of factors, including the “January effect” of selling for tax reasons in December and then reinvesting in January.

With the housing market firming, people began to feel the wealth effect, and decided not to stay on the sidelines. Consumer confidence rose. Investors who worried on the sidelines did not experience positive results during the market climb from its depths March 9, 2009.

Meanwhile, manufacturing seems to be rebounding. The Institute for Supply Management index rose to 53.1 percent, from 50.2 percent in December, beating analysts’ expectations. When the index is above 50 percent, it shows that manufacturing is expanding. Construction spending rose, and auto sales increased.

The Dow’s all-time high is 14,164. On Feb. 1, the Dow closed up 149 points to reach 14,010. The volatility index closed below 13. With the Dow within 155 points of its all-time high, it is a fair bet that retail investors will notice. When the Dow and S&P exceed their highs, we can expect the psychological effect to be even greater. The Dow is selling at 13 times earnings versus 16 times in 2007. The market could still have room to run.

The  long awaited and dreaded “fiscal cliff” finally arrived. In a previous column I described it as more of a fiscal slope than a cliff. We received a mixed bag of laws, which could have been better, but also could have been worse. It did provide clarity (not always welcome) for some stakeholders, but left many decisions to be made.

President Obama, after winning re-election, played a tough hand. Tax increases were on his mind, and he believed that he had a mandate to raise taxes because he campaigned on a policy of higher taxes. Describing his tax increases as “fairness,” he called for higher rates for higher-income taxpayers. He insisted that Congress deal with tax rates, and declined to offer any spending cuts.

With the power of his pen, and the Senate on his side, Obama’s only obstacle was the Republican-controlled House. While Congress and Obama knew that we had revenue and spending problems and a large budget deficit, the approaches of the president and the Republicans were vastly different. The president was not interested in spending cuts, but rather only more revenue. The Republicans believed that more revenue would come from a government more favorable to business and therefore the economy, and that spending reductions were needed.

The Democrats baited the Republicans by offering up no cuts, forcing the Republicans to name which entitlement programs they would cut, and by how much. Recognizing that putting a price tag on “sacred cows” was a losing hand, Republicans folded. The deal disappointed many people, but it extended the “Bush tax cuts” for some and mitigated tax increases for others.

It was not the deal Republicans wanted, but the best they were going to get. Budget cuts, never on the table except in the minds of the Republicans, were left for another day – one that may not ever arrive.

So, under this administration, the country is set on a path to increasing revenues through tax increases. It should come as no surprise that the president adhered to this policy. He did win the election after all, and made it clear that redistribution of wealth was his goal. Tax rates went up for individuals with income over $400,000 and couples with income over $450,000. The alternative minimum tax was fixed at $50,600 for individuals and $78,750 for couples, with the rates being indexed for inflation.

For investors, the capital gains rate and dividend and interest tax rates were set at 20 percent, with an additional 3.8 percent tax on passive income to support “Obamacare.” Individuals will see expiration of the 2 percent payroll tax holiday. The estate tax rate was set at $5 million for individuals and $10 million per household, indexed to inflation with the top estate and gift tax rate set at 40 percent.

For investors, things could have been worse. Dividend-paying stocks, municipal bonds and electrical utilities will still be worth holding for their income. With parity between dividends and interest on one hand, and capital gains on the other, some investors may still wish to hold stocks for longer terms, so they can time their tax bite. Companies may prefer to buy back stock rather than return money to shareholders through dividends.

The stock market got a lift from the compromise. It jumped 4.6 percent, with the S&P hitting five-year highs. U.S. Treasurys fell 4 percent as the threat of higher interest rates and the end of Federal Reserve support for the bond market loomed. Right now, the only good thing about Treasurys is that they are inversely correlated to stocks. While that has been a winning hand in the past, investing in equities may now be better – unless a “safe haven” is desired.

The debate now moves to raising the debt ceiling, where Republicans believe they have an advantage. However, that advantage may not be much given that the bills that are due largely are for money already appropriated or spent. Restraining spending is their only hope, but Congress recently passed a $60 billion Christmas tree bill ostensibly to aid victims of the Sandy “superstorm.”

This example does not bode well for restraint. According to public opinion polls, most American voters believe that the U.S. faces a grave budgetary crisis unless deficits and debts are brought under control. Yet no one wants their pet programs cut. Ultimately, the U.S. must show a willingness to match expenditures to income or face another credit rating downgrade.

Of vital interest to all parties now is avoiding another recession. This means that Obama, Democrats and Republicans need to show an interest in economic policy that was absent in the president’s first term.

Investors have sought refuge in bonds during this time to avoid risk, but in so doing they have bid bonds to a risky level – perhaps even a bubble. They also have forfeited returns. As long as investors are as worried about the equity market as they are now, the appeal of bonds will continue. However, at some point we can expect that trend to unwind with investors returning to equities.

With bonds returning low yields and possessing little upside potential, there is definitely a possibility that investors will run to the other side of the boat. When that happens, we can expect a sell-off in bonds and an increase in equity prices. The catalyst for such a move could be a resolution of the “fiscal cliff” disagreement, or a solution to the various European crises.

The U.S. is probably closer than Europe to reaching an agreement. While one does not appear imminent in the U.S., it is still likely that some sort of agreement will be reached, even if it is only to “kick the can down the road” – a real possibility.

As bad a job that the legislative and executive branches have done, and are doing, neither side wants a calamity. The impetus for a deal is strong. What they are trying to gain now is bargaining position and painting the other guy as the bad guy.

At this moment there are neither statesmen, nor a realization that give and take will be necessary. Such is the nature of politics. The president believes, rightly so, that he was elected on a platform of raising taxes. Republicans are willing to see revenue growth, but through limiting deductions. Republicans also want spending cuts that the president is not willing to give. Thus, a stalemate, for the moment, is reached.

But the risks of failure are too great, and an agreement of some sort will be reached. In the past, in these brinksmanship disputes, the agreement has come between Dec. 15 and 27. President Obama has promised a deal by Christmas. So, the scratching and biting will continue for a while longer.

Economists and investment strategists, in the meantime, predict a bad result if an agreement is not reached, but also believe a deal will be struck.

Popular consensus is that earnings will grow about 7 percent in 2013; this is not robust growth, but it is growth nonetheless. Furthermore, there is a growing consensus that investors will gravitate out of fixed-income investments and into equities, reducing the value of bonds and increasing the P/E ratio on equities.

With some economic growth and with some P/E expansion, one can expect a decent return on equities with continued muted returns on bonds. The broad market has risen 10.8 percent exclusive of dividends since market lows were reached on June 1.

The S&P 500 is up 14.32 percent since Jan. 1. The Barclays all-bond index is up 4.3 percent. At some point, that difference will have an effect. When adding to expected GDP growth the massive buybacks the U.S. companies are doing in order to return money to shareholders, and the special dividends they will pay this year to escape higher taxes, the equity markets look attractive.

Europe has not solved its debt problems and its economy continues to slow with unemployment rising. Even with slow GDP growth, the U.S. looks relatively better than Europe from an investment perspective. Emerging markets look the best of all, given their faster rate of GDP growth. Emerging market bonds also are attractive from a yield point of view.

China, always opaque, appears to be bottoming – primarily because of massive government intervention in the economy. Such intervention may be creating its own bubble. My recommendation is to turn off the talking heads, tune out the background noise and keep a steady hand on the tiller. Above all, do not panic.

Both candidates spent lavishly in what was by far the most expensive race in U.S. history. Obama won a second term as president of the United States, joining a select group. Despite seeming to be disengaged from the campaign, and running on a mixed record with the electorate strongly divided, he won a resounding victory in the all-important Electoral College. The popular vote was closer.

Obama won the election by out-organizing the Republicans. His “ground game” brought the results he needed in turnout and delivered the toss-up states that he needed to win. He received 70 percent of the Hispanic vote, and strong support from women voters.

Mitt Romney suffered from an overlong campaign, with too many brutal primaries, a divided party, and positions that turned away Hispanics and women. Late in the campaign, he seemed dogged by missteps and changed positions.

Romney’s choice of a running mate, meant to appeal to the party’s right wing, brought little benefit. He could have added Sen. Marco Rubio from Florida, or Sen. Robert Portman, a popular Ohioan who regularly wins his elections with more than 70 percent of the vote. Both come from key states that Romney lost by narrow margins.

Democrats also fared well in both House and Senate races, picking up seats and strengthening Obama’s hand. The president, who believes in the long view of history, is now focused on how history will view him.

He seems to disdain the day-to-day workings of the presidency, preferring soaring rhetoric. He laments that people do not share his vision, and lectures rather than persuades. “Obamacare,” the pre-eminent legislation of his first term, is now a permanent part of the economy.

Expiration of the Bush tax cuts will increase ordinary income rates and capital gains rates. I expect that some companies may pay a special dividend between now and the end of the year, to move some of their considerable cash to shareholders at the current lower dividend tax rate. Investors should consult with their accountants to see whether they should be making tax-related changes in their portfolios.

Fitch Ratings warned Congress and the president to reach an agreement to avoid the fiscal cliff or face a further downgrade of U.S. sovereign debt. Clearly, the resolution of the debt crisis and the debt ceiling is now the next item on the agenda. Clearly too, the Democrats have a stronger hand to play, but the Republican-controlled House cannot expect to go gently. We will be in precisely the kind of politics – give and take – that Obama does not enjoy.

In his first formal comments after the election, the president called for an end to the Bush tax cuts and minor adjustments in the rest of the budget. House Republican leader John Boehner replied that he could accept some revenue increase if there was tax and spending reform along with the additional revenue.

The two will now have to begin serious face-to-face negotiations. Perhaps fears of the “fiscal cliff” will drive a bargain. Much work remains to be done.

Until the financial issues are resolved, we can expect more pressure on the markets in the short term; however, it is still possible for the market to be higher by the end of the year. The economy may grow even slower than thought and equities even less so, but with interest rates near zero, there are few alternatives to equities.

Published October 15, 2012

The market closed at 1,278.04 on June 1. It has since risen 12.7 percent through the third quarter in a stealth rally. The market closed at 1,440.67 on Sept. 30. In September, usually the worst month for markets, the S&P rose 2.6 percent, the Nasdaq rose 1.6 percent and the Dow rose 2.75 percent.

At the conclusion of the quarter, the Dow had risen in 11 of the past 12 months, falling only in May. The last time this happened was in 1959. The Dow has had a remarkable one-year run in which it has gained about 2,500 points, or 23 percent.

It was not all smooth sailing, because most of the September gains came in the first two weeks. Durable goods orders in July-August fell 13.2 percent. At the end of September, consumer sentiment fell. The nonmanufacturing index rose to 55.1, but less than the 55.3 expected. Second-quarter GDP was revised lower to 1.3 percent growth.

However, jobless claims fell slightly and the economy in September added 162,000 jobs – well short of the 250,000 needed to absorb new workers let alone those out of work for extended periods. By the end of September, government statistics showed that the unemployment rate was below 8 percent, for the first time during the Obama administration.

The market got a lift from the announcement by the Fed of another round of quantitative easing. Both the anticipation of QE3 and the implementation lifted the market. Investors were reminded of the old saw “Don’t fight the Fed,” as the markets went up.

All the positive news gave a boost to the Obama campaign. Historical studies show that in most elections, when the market rises in the two months preceding the election, the incumbent wins. Obama still holds a narrow lead in the critical swing states.

The debates, however, may well prove decisive. In the first debate, President Obama appeared lackluster. Mitt Romney and his supporters took heart from the debate and the audience response.

National polls still show Obama with a lead, but within the margin of error. The president’s strength comes from a strong lead among women, Hispanics, blacks and young adults. Voter turnout will be a critical factor in the race.

Global markets experienced widespread positive returns for the quarter and year-to-date, with the global market equity index up 12.21 percent in 2012. The turmoil in Europe subsided somewhat after European Central Bank President Mario Draghi stated that the ECB would do “whatever it takes” to preserve the Euro,” and therefore the eurozone.

Draghi has his work cut out for him. He made his pledge in a surprise comment inserted into a speech at the last minute. The effect was to box in Angela Merkel and the Germans because while they wish the eurozone to survive, they have been dead set against a commitment by the ECB to back other countries in their debt problems. Now Merkel is stymied and on her way to Greece to work out a compromise. She does not want problems as she faces an election next year.

China’s economy continues to shrink, which also casts a cloud over world economies. This comes at a difficult time for the Chinese government as it is engaged in its once-in-a-decade handover of power to the next generation. We can expect the government to do all in its power to make the transition peaceful.

The U.S. economy may experience some slowing as a result of the European and Chinese issues, but in general it should muddle through (barring any unforeseen shocks to the system). We continue to remain fully invested in growing companies.

However, political risk hangs so heavily over markets globally, it is hard to be anything but worried. Furthermore, September is a notoriously difficult month for stocks. Expect more turbulence.

Globally, economies are slowing. Even Germany, which has been the bulwark of the European economy, has slowed as Europe sinks into a recession. In Asia, much uncertainty prevails as China, the key driver there, sees its economy slowing.

In the U.S., signals are mixed. Factory orders are reported stronger than expected. Consumer confidence, as measured by the University of Michigan index, also is surprisingly up.

Durable goods manufacturing is up 9.8 percent year over year, with durable goods sales and orders both up over 14 percent. Factory order backlogs are 14.4 percent. New housing starts are up 29 percent, and new housing building permits are up 29 percent year over year.

The big three automakers mark double-digit sales gains in August year over year. Productivity increases to 2.2 percent up from expected 1.9 percent year over year.

But other measures, such as the purchasing managers’ index and the construction index (which includes government construction), show declines in July and August. And a serious drought in the Midwest threatens farmers and farm-related industries.

With the mixed tone, one can be wary of the U.S. economy – especially factoring in the political risk. As the election nears, the outcome is still very much in doubt. At this juncture, President Obama is probably still the odds-on favorite to retain his job; however, former Massachusetts Gov. Mitt Romney is within striking distance.

Romney has the all-important edge in money. Obama holds the incumbency, normally a powerful weapon. However, since the years of the Obama presidency have been a disappointment to both the right and the left, he should be an easy target.

Romney has thus far failed to take advantage of the deficiency in results. Usually, a candidate gets a “convention bounce” (a lift in the polls) after a national convention; Romney got none.

Two states hold the key to a Romney victory: Ohio and Florida. If he were to win Ohio and lose Florida, he would have a chance to cobble together a victory; but it would be difficult. If he were to win Florida and lose Ohio, he would have a much better chance to win. If he were to win both states, he would likely win the election.

This is why it is so puzzling that he passed up popular politicians in Florida and Ohio to make Rep. Paul Ryan of Wisconsin as his running mate. Sen. Rob Portman in Ohio has an excellent record among Ohio votes and has won difficult elections there. Sen. Marco Rubio of Florida is popular in his state and has the added advantage of being Hispanic at a time when Hispanics are expected to have a large impact on the race. Romney is running a distant second to Obama among Hispanic voters.

Romney also has a deficit among woman voters, and a polarizing Ryan will not help there. Of course, Ryan does energize the Tea Party base of the Republican party as well as the social conservatives; however, he energizes voters both for and against a Romney candidacy. Instead of moving to the center to pick up votes, Romney moved to the right, and passed up opportunities that could have helped in critical swing states.

These decisions by Romney and his election team, plus outrageous comments by Republican Senate candidate Todd Akin of Missouri, cast a cloud over Republican chances in the fall. If the Republicans were to make a clean sweep of Congress and the White House, at least we would have a clear policy. However, if the Republicans were to win the House and lose the Senate and the White House, we may have more of the deadlock we have experienced – and the “fiscal cliff” may become a reality.

A divided government will present serious burdens for the economy. The “fiscal cliff” means that the Bush tax cuts will expire and one trillion dollars in revenues will become sequestered. Economists predict that this outcome will plunge the U.S. into a recession, taking the world with it.

In Europe, the struggle over the salvation of the euro and the eurozone continues, also with a heavy dose of politics in the background. European Central Bank President Mario Draghi has pledged to save the euro, which has already lost a lot in value. But the euro, always a political currency, is at risk. One or more countries might return to their old currency, and that might be the best outcome. But problems in Spain and Italy wait in the wings, and a solution must be found there too. However, the Germans do not like the options on the table, and there things stand. I do believe that the bones of a deal are there, and it would not take too much for the countries to agree, but Greece may still be on the way out of the eurozone.

These reasons are why Ben Bernanke, in his latest speech in Jackson Hole, outlined a plan to move the U.S. economy forward. He spoke of a “grave” unemployment level, language never before employed by a Federal Reserve chairman.

His plans will not be popular in some quarters. Romney has already pledged to fire Bernanke as one of his first acts. The likely outcome of the Jackson Hole speech will be one or more unconventional acts: extending the period of low interest rates into mid-2014, buying more Treasury bonds and perhaps even mortgages or other alternatives, or a combination.

So, as I stated last month, the burden of economic growth and stability falls upon Central Bankers as politicians fail to provide solutions.

Indications are strong that the global economy is slowing. In Europe, a continent sinking into recession, even Germany is showing signs of struggle. China is letting its currency devalue in an effort to lower the costs of its exports and set up a conflict with the U.S. The yuan’s lower value will lead to jobs being siphoned from other countries.

In the meantime, the U.S. economy has been affected by the global slowdown. The Federal Reserve has noted that economic activity has decelerated somewhat over the first half of this year. Consumer spending has slowed, which is worrisome because consumer spending represents about 70 percent of GDP. Normally resilient restaurant chains such as McDonalds, Starbucks and Chipotle Mexican Grill noted a drop in consumer traffic.

However, a few bright spots have appeared. Jobless claims are mildly positive, durable goods orders are slightly better than expected, and U.S. GDP rose by 1.5 percent in the second quarter – slightly more than the 1.3 percent expected.

The Federal Reserve, after meeting July 31 and Aug. 1, decided to continue its accommodative stance and provide additional support as needed. This was a mild approach to the problems at hand, and disappointing to the markets.

In light of the slowdown in Europe, Mario Draghi, president of the European Central Bank, pledged to protect the eurozone. He was joined by German Chancellor Angela Merkel, and French President Francois Hollande. Their full-throated defense of the eurozone has been followed by little definitive action. The ECB in a recent meeting promised more meetings and initiatives, but little of substance. The markets were very disappointed with Draghi’s follow-up to his strong comments, and the European markets and the euro declined. It appears that the Europeans are not ready to move forward with a solution, but rather seek more meetings and discussions.

In general, the ECB has had to shoulder the burden of the slowing world economy as politicians have failed to address economic issues. But a climactic event may be needed for the leaders in both continents to move.

Prices of metals from gold to copper continued to slide. That signals a slowing economy with lack of economic leadership. One can only hope that behind the scenes someone is paying attention and moving to a solution.

Europe seems hopelessly deadlocked, with the Germans pitted against the rest of the eurozone. It is certainly in Germany’s best interest politically and economically for the eurozone to succeed, but it simply does not want bailouts of sovereigns or banks.

The U.S. also faces a “fiscal cliff” this winter when the Bush tax cuts expire and spending cuts commence. The U.S. House has passed a tax cut extension, but politics will keep the extension bottled up in the Senate. The outcome of the presidential election probably will determine the outcome of the debate over tax extensions. However, if they are not extended, and the sequestration of expenditures commences, we will see a significant drag on the economy; hence the dependency on the ECB for relief.

On my recent trip to Europe I got a ground-level view of the eurozone, and found strong support for it and the ECB. The ECB has made substantial investment in the former communist countries, and their economies will benefit. The ECB also has higher standards for business ethics than the former communist administration; this puts pressure on those countries that want to enter the ECB to clean up their act, and encourages present members to be even better than they are.

Eurozone citizens seem to understand that the ECB is good for them, wish to join and want it to survive. The younger people are far more entrepreneurial than older folks who long for their regular paychecks with little or no work. Today’s consumers don’t have to stand in long lines for uncertain results; however, if they don’t have money to buy things, it doesn’t matter much to them whether they are a communist or a capitalist, so older people prefer the regular-paycheck-and-no-work economy.

I saw plenty of evidence of younger people who were working hard to make a dollar, and they will be the ones who rebuild the economies of the former Eastern Bloc. The nations probably need another generation to die before they can evolve successfully.

For the balance of the year, I expect challenges to the economy and the markets. For the longer term, I expect muted returns; but if you are circumspect, you should be rewarded. Expect volatility, but don’t panic. The markets will be headline driven, while companies quietly make their way. Sometimes the boring things, such as dividend and profits, are best.

Many investors have coped with the recent market volatility by selling out of equities. But a cash portfolio is unlikely to grow to levels that will satisfy many of their long-term needs.

Given that today’s inflation rate (1.7 percent) is greater than the interest earned on cash (almost zero), a cash portfolio may be locking in negative real yields – and thereby losing value. In other words, in their desperation to achieve safety in the short term, investors may be sacrificing it in the long run.