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

It’s been a very interesting couple of days for the economy and the markets. I’ve pointed out before that, in fact, the economy and the stock market are only loosely connected; good news for one isn’t necessarily good news for the other, and that is now being illustrated very well.

The other key point that we’re getting a much closer look at is the conflict between a recovering economy and the likelihood of continued Federal Reserve support. There is an implicit assumption in current market valuations, in my opinion, that we will get both revenue and EPS growth (which to some extent requires economic growth) and continued Fed support of lower interest rates (which to some extent requires economic weakness). You see the problem here.

“If something cannot go on forever, it will stop.” — Herbert Stein

I’ve been using this quotation in speeches for years. Like several of Churchill’s, it is so wise in its generality that it just keeps suggesting itself.

I spent a week or so recently writing about the problem of money, concluding with a discussion of the dollar’s reserve currency status. There, I noted that, in the next 10 years or so, the dollar would remain the dominant reserve but that other currencies, particularly the euro and the yuan, could also become major reserve currencies if they addressed certain shortcomings.

Per Bloomberg today, the yuan has passed the euro to become the second-most used trade finance currency. Use of the yuan was 8.66 percent in October, up from 1.89 percent in January 2012, while use of the euro dropped from 7.87 percent to 6.64 percent.

I hope everyone had a great holiday. I certainly did, as my sister and her family hosted us for a wonderful Thanksgiving dinner and very fun weekend. Thank you, Beth and Kevin, and thank you, Jake, Jesse, and Max.

Once upon a time, a turkey hatched in the dead of winter. He lived in a nice warm coop, had plentiful corn and seeds to eat, and spent much of his poult-hood playing with all of the other little turkeys. When spring came, he and his friends ventured out into the yard and played some more; they continued to have corn and seeds to eat and shelter from the rain. The summer brought more of the same, along with nice people who regularly cleaned the coop, refilled corn and seed stores after the turkeys gobbled it all up, and chased away scary critters like foxes and cats when they got too near.