The last time that the Federal Reserve (Fed) was widely expected to start reducing, or “tapering,” its bond purchase program, earlier this fall, interest rates increased and the market tanked. Widely referred to as the “taper tantrum”—a term I wish that I had invented—the drop was quickly reversed when Fed officials came out and reassured the market that, in fact, they had no intentions of pulling back, ever. Really.

That was then. Since that time, the economy has shown improved growth, interest rates have ratcheted back down, and the stock market has recovered and powered up to new highs. With the recent good economic news—much higher levels of GDP growth than expected, higher employment figures and lower unemployment, and very positive business surveys, among other highlights—the Fed is at a point where a taper pretty much has to start soon. Maybe not this week, but soon. The budget deal in Washington also makes a taper more likely because the last reason for the Fed to continue its stimulus was worry about fiscal policy disruption.

I got some interesting feedback the other day from a Commonwealth advisor who was commenting on a piece I’d written about the economic recovery. His point of view is fairly common and can be summarized as follows: “The fact is that the sheer size of government has doubled over the past 10 years.” He made other points, but they hinged on government growth being out of control. A fair point, if true, but before we get too far into it, I thought it would be useful to see how much government actually has grown.

Let’s look at employment first. We can see from the following chart that total government employment is up by 322,000, or 1.5 percent. Over the same time period, the U.S. population—a reasonable comparative metric—is up by 8.2 percent, so government employment has grown much less than population.

One of the things I do every day is look back at the previous day and think about what I could have done better. Not so much how I failed (although that occasionally comes up) but whether I did the best I could, and what I could do better.

I’ve been saying for some time that wage growth will be faster next year than this year, and, per the chart below, we can see that it is, in fact, accelerating. It certainly isn’t where we would like it to be, but the trend is in the right direction. Note also that this is in real dollars, reflecting actual gains in purchasing power and not inflation.

I want to be excited about the new federal budget deal, I really do. I get it: it’s big news that we actually have an agreement—for two years even! We can look forward to an absence of catfights, reduced uncertainty, and less of all the good things that go with minimally responsible government.

And yet, I can’t help but feel depressed that such a minimal agreement warrants front-page news in both major national papers. What does this say about our governance? The other thing that worries me is the extensive caveats in those stories—how the deal may well not pass since the conservative Republican elements in the House are dead set against lifting the sequester spending cuts, while many of the more left-leaning Democrats are dead set against the spending limitations and letting extended unemployment benefits expire.

One of Commonwealth’s affiliated advisors, Tom Hine, sent in a question, basically asking, How does now compare with 2007? To quote him directly: “Many of us who are long-term optimists like myself need a dose of reality, because back in 2007/2008 many people felt the same way—yet clearly there were some flashing yellow lights!”

I couldn’t agree more. As I’ve written before, we tend to forget what actually happened very quickly, overweighting more recent experience simply because we remember it better. With that said, let’s look first at the real economy and then at the financial markets.

I’ve been working on gathering my thoughts for the market in 2014. This is a very useful exercise, in that it forces us to really think about what goes into stock prices, what those assumptions should be, and how they interact.

There are three key variables here: the growth rate of the economy as a whole and the level and change in profit margins (which together will determine corporate earnings growth), and the level of price multiples (or how much investors will pay for a given level of earnings). The fourth variable, what happens in Washington, DC, factors in as well, of course, but that’s a subject for another day.

I’ve talked over and over about the importance of valuations in investing, and Peter Essele, CFA®, a portfolio manager in Commonwealth’s Asset Management group, does a great job of putting that idea to work with the following post. Thanks, Peter!

This year has been an interesting one for investors, especially those with a more global bent to their portfolios. As of yesterday’s close, the S&P 500 and MSCI Emerging Markets Index have returned approximately 26 percent and −3.9 percent, respectively, so far this year. That’s almost a 30-percent difference! To illustrate this, we put together the following chart, which shows the 12-month difference in returns between the S&P 500 and MSCI Emerging Markets over the last decade.

Another surprisingly good economic stat came out today: Employment increased by 203,000 for November, higher than the expected 185,000. Unemployment decreased to 7 percent for the headline U-3 number, while the underemployment rate, the U-6, decreased by a full 0.6 percent to 13.2 percent.

https://www.youtube.com/watch?v=_z4xc24zwC4