The winning ways for stocks continued last week, thanks to some additional progress on the European debt crisis and a surprisingly strong January labor market report for the United States. With these gains, US stocks are within striking distance of the cyclical peak reached last April, although global stocks are still about 10% below last year's high point.

Last week's employment report was significantly stronger than expected. Payrolls rose by 243,000 last month and the unemployment level fell to 8.3%, its lowest level in almost three years. Equally important, the report showed large upward revisions to November's and December's data and the numbers regarding income and hours worked were also pointing in the right direction.

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The improvements in equity markets in the early weeks of 2012 are particularly notable given that stock market gains have been global in nature. In fact, the past three weeks mark the first time since 2007 that markets in the United States, Europe and China have all advanced at the beginning of a year. Despite the gains, however, it is important to point out that mutual fund flows are still showing that investors are moving out of equities, indicating that risk aversion remains high.

One of the key recent economic data releases showed that US jobless claims fell by 50,000 last week to 352,000. That drop represents the largest weekly decline since 2005 and suggests that the January payrolls report could be a strong one. Our estimate is that when that data is released in a couple of weeks, it will show that around 150,000 new jobs will have been created.

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Skeptics would suggest that the solid start to 2012 is little more than a typical "January effect" in which stocks tend to rise at the beginning of the year, but we think there is more to it than that. In part, we believe the upward moves of the last two weeks can be attributed to the fact that many investors (including active fund managers) came into the year underexposed to risk assets following a disappointing 2011, and who are at this point beginning to put their cash to work.

So what will it take for the market's winning ways to continue in the year ahead? We are cautiously optimistic that good returns for stocks will not require strong economic or earnings growth this year, nor will they require significant upside surprises. In our view, given that expectations and investor sentiment are quite depressed, if the world is able to avoid major accidents and policy mistakes and if existing sources of risk are contained, we should see some decline in volatility levels and a diminishing of investor uncertainty and fear. These trends, in turn, should allow more investors to move back into the markets.

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The first week of 2012 was a positive one for risk assets as the flow of economic releases continued to be somewhat better than expected. Markets in the United States focused on the positive last week, and looked past rising oil prices and some data from Europe showing that a recession in that region was growing increasingly likely.

Recent positive economic data includes rising levels of construction spending, better manufacturing data and, perhaps most importantly, signs of improvement in the labor market. The December employment report was released last Friday, and showed that private payrolls grew by more than 200,000 jobs in the last month of 2011. The report also showed increases in average hourly earnings and the length of the workweek.

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2011 was a volatile and disappointing year for most investors. Expectations entering 2011 featured a continuation of economic recovery around the world from the Great Recession, despite ongoing deleveraging and residual debt and credit concerns. Debt and credit issues, however, obviously exploded over the past year, particularly in Europe. The investment landscape was one driven by fear and anxiety and while earnings were up in most places, multiples were down, causing equity markets to struggle.

We continue to operate in a post-credit bust world, a chief consequence of which is ongoing deleveraging. As a result, economic growth will likely be slow in 2012. Slow growth should be partially offset by the forces of accommodative monetary policy in much of the world, designed to provide the liquidity necessary for solvency and debt repayment. This combination of slow growth and debt repayment/deleveraging is likely to be a difficult one, fraught with occasional accidents and subject to low tolerance for policy errors.

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Market action last week centered on the European summit that took place on Thursday and Friday. While no one is suggesting that the debt crisis will go away any time soon, the framework agreement that was reached has at least reduced some of the anxiety and appears to have eased the gridlock in European financial markets.

Although there are many details that still need to be worked out, it does appear that most parties in Europe are in agreement about the need to establish a more stable fiscal union that has tighter controls over the region's debts and deficits. While these moves will do little to ease the near-term debt issues affecting many European countries, they are important in that they represent the start of the process of assuring investors and central bankers (particularly the European Central Bank) that politicians are serious about fiscal discipline and that they can no longer delay action. In our view, last week's summit may well represent the first tangible positive developments since the crisis began.

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After two weeks of disappointing economic and policy news that drove stock prices sharply lower, stocks witnessed a strong reversal last week. The main catalyst for the rally was a global coordinated central bank policy action designed to help banking liquidity, but markets also benefited from some improved economic data.

Last week's market action centered on the US Federal Reserve's and other central banks' announcement that they would provide coordinated action to boost the liquidity of the financial system by reducing dollar borrowing costs from foreign central banks by between 50 and 100 basis points. The central bank actions are clearly a positive in terms of investor sentiment and will be helpful from a practical basis regarding expanding liquidity. Importantly, the move does underscore the willingness of the Fed and other central banks to support the global banking system.

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Equity markets sank sharply last week as the European debt crisis worsened and the US super committee failed to come to an agreement. Because the political problems in the United States and the crisis in Europe could result in a nearly endless array of outcomes, investors are faced with a high degree of uncertainty. As a result, unless and until more clarity emerges, markets are likely to remain somewhat trendless in the near term.

While much of the focus on the euro crisis has been on Greece and its risk of defaulting, in recent weeks, that focus has shifted to a general lack of liquidity within the European debt markets as banks struggle to maintain credit ratings. Many large global banks are attempting to sell or reduce their exposures to troubled European sovereign debt, and the selling pressures are triggering a new surge in government bond interest rates. This, in turn, has been forcing more countries into higher debt burdens and bigger deficits.

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Markets continue to be dominated by the EuroZone sovereign debt crisis, with Italy replacing Greece at the center of the crisis. How this crisis plays out is not predictable, and the upcoming days and weeks continue to be important to the outcome. Leadership changes in Greece and Italy have focused investors’ concern on whether political leadership is splintering. In our view, the crisis is moving to a point that will force leaders to make hard decisions, or the markets will simply drive Europe into recession. Notwithstanding this backdrop, risk assets were mostly up in a volatile week.

 To US investors, the main issue has been, and continues to be, the issue of contagion. Although US banks have been steadily rebuilding their balance sheets since 2008, the European crisis poses a threat in terms of liquidity and counterparty risk. As always, the biggest concerns are the unknowns.

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Notwithstanding last week's decline, stock markets have accelerated sharply since early October, and it is worth taking a step back to consider what has changed over the past month. Several weeks ago, investors were facing the dual threats of the inability of European policymakers to solve the debt crisis and what seemed to be a growing likelihood of a double-dip recession in the United States. Given that backdrop, equity risk premiums had moved sharply higher. Today, while the environment can hardly be called great, these risks seem less severe than they previously were, which has allowed the risk premiums to recede somewhat.

In Europe, the odds are growing that policymakers will be able to contain the debt crisis and engineer some sort of stable and organized default of Greek debt. Additionally, the ECB has transitioned to an easing bias, which should provide at least some help for the overall economy. In the United States, risks of a renewed recession have been fading and while growth levels are certainly not robust, the economy does appear to be poised to continue to deliver modestly positive levels of growth. The debt crisis and ongoing economic uncertainty are likely to remain headwinds for stocks for some time, but it does appear to us that markets have moved past the period of greatest risk.

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