INCLINE VILLAGE, Nev. - The economic news is not one-sided, there's both good and bad. Housing prices are rising and sales are picking up. Good. Housing is not as large a factor in GDP as it once was, but it's still important for home builders, furniture companies, appliance makers and many others. Last week's report on consumer sentiment showed more improvement. Corporate balance sheets are stronger than ever. Not all the news is gloomy.On the other side, orders for durable goods are weak and the manufacturing sector is once again shedding jobs. Growth in China continues to slow, the IMF reduced its global outlook, and of course there is our fiscal cliff. Last month's jobs report showed a drop in the unemployment rate and slight increases in hours worked and hourly earnings, but new hiring was at a pace below that needed to hold the rate steady.Stocks continue to roll along with occasional profit-taking. The S&P gained 6 percent in the third quarter and is up 14 percent year-to-date. The positives are still carrying the day. Among them, income-seeking investors are buying dividend paying stocks and valuations are attractive relative to bonds. Why some bonds (many Treasurys) have negative real returns is beyond me to understand.On an after-tax basis, it's even worse. Never before have people paid so much for so little. They'll regret it. While the Fed controls short-term rates, the market sets long-term rates. If the economy dramatically improves or if the world's investors (hello China?) lose confidence in our fiscal outlook, longer-term rates could rise in a heartbeat.The Fed, by pledging to keep short-term rates near zero for years, is putting a floor under stocks, especially those with relatively high yields, and penalizing cash. That means there is far more upside potential than downside risk, at least as long as the Fed stays on this course. Let's enjoy it.- David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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