Market Commentary from Ron Mastrogiovanni

France, Italy, Spain, and six other European nations were downgraded by S&P on Friday; Greece is on the verge of collapse; Iran continues its threat to block the Strait of Hormuz; JP Morgan Chase missed its revenue target, and the weekly jobs numbers fell short of expectations, but the Dow still finished the week up 0.5%. Go figure. One theory is that the stability of equity markets during the first two weeks of the year appears to indicate that stocks are selling at a discount, and stock prices also reflect many of the problems facing our European neighbors.

The shortened week ahead is charged with earnings and economic news that could significantly influence the volatility needle. Citigroup, Goldman Sachs, Bank of America, Morgan Stanley, Wells Fargo, Charles Schwab, US Bancorp, Amex, United Health, Google, IBM, Microsoft, Ebay and GE will all be reporting fourth quarter earnings and future guidance. On the economic front, the focus will be on housing starts, mortgage applications, existing home sales, industrial production, Producer Price Index (PPI), and jobless claims.

By the end of the week, investors will be able to judge the health of our banking system, whether the housing market is actually experiencing a turnaround, and corporate forecasts for the first half of 2012.

Given the potential political and economic issues facing investors, a prudent, short-term investment approach is to remain cautious. Keep in mind that should the Iranian issue escalate, oil prices may exceed $200 a barrel, and the global economic impact could be catastrophic resulting in a major pullback in stock prices.

Nonetheless, equities are selling at a discount. Ten-year Treasuries are yielding 1.85% and the S&P is generating approximately 2% in dividends, exceeding the yield of ten-year U.S. Treasuries. The price-to-earnings (P/E) ratios of the S&P and Dow currently stand at 12 times earnings, versus an historical average of 15 to 17 times earnings. The PowerShares QQQ Trust, which mirrors the NASDAQ 100, is currently trading at 14 times earnings, well below its long-term average.

Therefore, if you do not plan to retire for 5 years or more and can handle potential short-term market declines, a diversified portfolio populated with a higher concentration of equity will likely generate attractive long-term returns. The key question prior to increasing exposure to stocks is whether you can sleep at night if equities fall 10%, 15% or even 25%. If you do have a high tolerance for risk, equities can offer exceptional long term upside opportunity.

The following is an update of my two model portfolios:

Model Portfolio #1: Moderate Risk (5o% Equity, 40% Fixed Income, 10% Cash)

Portfolio #1 has generated a year to date return of 0.76%.

Model Portfolio #2: Moderate Risk+ (55% Equity, 40% Fixed Income, 5% Cash)

Portfolio #2 has generated a year to date return of 1.40%

Despite the fact that Portfolio #2 has outperformed Portfolio #1 for a couple of weeks, do not assume it should be the preferred option. It takes several quarters to track an investment program’s progress, and Portfolio #2 does carry more risk. When (and not if) we experience a pullback, the less volatile Portfolio #1 will likely outperform its more aggressive counterpart. As mentioned above, the right mix of stocks, bonds, and cash equivalents is dependent upon your risk tolerance level and investment time horizon.