Any economics student will tell you central banks must achieve three things to effectively implement monetary policy: (1) independence; (2) credibility; and (3) transparency.For most of the Feds history, the first two characteristics were arguably well attained.However, the group was never well known for clarity into its thinking.

As the Federal Reserve prepares to debate the merits of tapering its asset purchase program this week, a key area of the economy that will be closely analyzed by Bernanke and Co. is the health of the American consumer. There are tenuous signs that consumers are spending more, but attitudes towards the economic recovery are hardly encouraging. Consumers will find it difficult to stay the key cog of economic growth in the U.S., but at the very least, their participation in the recovery is imperative, and leaves much to be desired.

Bear market enthusiasts have so far been disappointed in September after the sudden market rally last week. With equities up more than 1% on the month, many bears pointed to the historically poor performance of equity markets during this month as a reason to remain cautious. Bear enthusiasts need not fear, as markets appear to be converging toward an inflection point right around the Fed meeting in the middle of the month.

Since the end of the Global Financial Crisis (GFC), investors moved aggressively into fixed income asset classes. They were quickly rewarded in the years following the crisis with a combination of falling interest rates and tighter credit spreads, which led to positive absolute returns. The easy money in fixed income is gone, however, and now is the time for careful asset class selection.

As the Federal Reserve grapples with when and how to unwind quantitative easing, interest rates climbed more than a point since the end of 2012. This caused mortgage rates to increase to their highest levels in two years last week, with the average conforming 30-year loan jumping to 4.58% from 4.40% the week prior. Rising financing costs is presenting a headwind for one of the biggest bright spots in the US economy over the past 12 months.

The summer months brought a period of calm to global markets and economies. Nearing the move to autumn, it is time to look ahead and see what resides on the horizon. Investors could be due for a renewed bout of volatility based on any number of events set to happen before year-end.

Prior to the global financial crisis, decoupling was the word du jour. In the years since the crisis began, however, decoupling has vanished from the everyday lexicon. In recent weeks, the financial media noticed a new form of decoupling, one that shows improving growth prospects in the developed world but slower growth in developing economies. Rightly or otherwise, much of that slowdown is pinned on China and recent data continues to suggest a slower pace of growth than investors became accustomed to in prior decades.

In a busy week of economic data, investors ended the week on a mixed note.The government jobs report revealed a labor market experiencing steady if not unspectacular growth, as nonfarm payrolls came in below consensus estimates while the unemployment rate surprised to the upside.

Although it was a quiet week on the economic front, there were a few notable indicators to digest.

In the first quarter, we explored the divergence of emerging market equities from the US. We noted that a combination of factors likely drove the 12% performance differential, including investor risk appetites, inflationary pressures in developing markets, and reduced commodity price expectations.

In April 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. The legislation eased a number of regulatory burdens on small businesses and private industry in a bid to boost job growth. The bill made additional headlines for lifting an 80-year ban on solicitation for private placements, the restriction that prevented hedge funds from advertising their wares to the general public.

We shine a spotlight on the obscure market of high yield municipals this week. In the current fixed income selloff, the market has been among the worst performing with a drawdown of 6.1%. Investors could not get enough of the sector in 2012 as they chased yield; the Barclays high yield muni index returned over 18%. Investor sentiment has turned sharply, however, on this asset class. Funds experienced significant outflows over the last couple of months, which is especially troubling for a small and retail dominated market. Why did this onetime darling asset turn into a pariah so abruptly?

Following a few weeks of FOMC-induced turmoil, investors are looking forward to getting back to the fundamentals.Second quarter earnings season are set to kick off July 8 with Alcoa, in what will mark an important reporting period for financial markets.Given the now much telegraphed intentions of the Fed, investors are scrutinizing whether the US economy and corporate sector is ready to stand on its own feet.

After several decades of positive returns, fixed income investors are being treated to a rude awakening in the last six weeks. Recent comments from Federal Reserve officials suggest a sooner than anticipated exit from quantitative easing, raising the prospect of higher interest rates. Throughout the universe of fixed income assets, investors are questioning the future return potential, leading many to wonder, what now?

There have been an incessant number of articles in the past year addressing a Great Rotation by investors the seismic shift in asset allocation predicted to result from a transition to a rising rate environment. Individual investors spoiled by a 30-year secular decline in interest rates, it is thought, will run to new alternatives in the face of this structural headwind for a significant chunk of their portfolios.

Ever since Harry Markowitz brought forth the notion of mean-variance optimization in 1952, academics and practitioners alike have sought ways to build more robust asset allocation methodologies. Recently, the most talked about approach in the institutional world is risk parity, which seeks to focus on risk as its primary input. Risk parity is intuitively appealing, but suffers many pitfalls that investors need to consider.

Unlike most robust equity rallies, however, 2013 performance was initially led by traditionally defensive sectors, such as health care, utilities, and consumer staples. Through the first quarter, those three sectors posted an average return of 14.5%, while traditional cyclicals averaged just 9%. While some speculated this trend was due to investors reach for yield amid a frothy fixed income environment, the magnitude of this sector leadership (in an up move) was certainly unusual.

Global equity markets stammered through a choppy environment last week following increased fears that certain central banks were considering the possibility of pulling stimulus sooner than anticipated. Markets have long been dependent on central banks, but the notion that policymakers could head for the exits leaves investors unsure how to react.

Given the outsized role central banks are playing in todays financial markets, inflation watching has taken on increased significance.It is widely assumed that continued easy money policies are only possible as long as price increases remain under control.At the same time, for a global economy trying to escape an extended period of weak growth and burdensome debt loads, low inflation is a double-edged sword.

Housing, which for so many years represented everything bad about the credit crisis, is finally beginning to have its day back in the sun. Trends in housing markets around the country are improving, to the benefit of the overall economy. It appears that trend is set to continue.

Central banks around the world continue to provide increased stimulus to their respective economies. Increased conviction over pro-stimulus policies comes in light of recent flaws found in the Reinhart, Rogoff January 2010 paper, which suggested that government debt of more than 90% of GDP is detrimental to economic growth. The latest week brought another round of news in the world of central banking, although it seems the number of options left on the table is running short. What central bankers hope for now is that economies will finally enter recovery mode.

As investors near the witching hour of May, the oft-asked question once again comes to the foreground is it best to sell in May and walk away? This year could prove the exception to recent history, but a number of trends are beginning to take shape inside the markets inner workings.

Following the strongest first quarter in 15 years, it is not surprising to see equity markets faltering in April. Last weeks decline of 2.1%, however, may reflect deeper concerns about corporate fundamentals amid a mixed earnings season.

Tax season is once again upon the American population, and this year, just as in years past, people are less than enthusiastic. It is estimated that the average taxpayer contributed slightly more than $11,000 dollars to federal taxes in 2012 and those figures are on the rise. As might be expected in the current backdrop, however, not everyone shares the same opinion on taxes.

In an unexpected development, labor markets fell flat during March. Following several months of healthy job growth, the economy was only able to muster 88,000 new jobs in March, well below economists expectations for nearly 200,000 jobs.

The 30-day implied volatility index for the S&P 500 calculated by the Chicago Board of Options Exchange (CBOE), known as VIX, has long been used as an indicator of market sentiment. Commonly referred to as the fear index, the VIX often portends periods of stress in equity markets, as options traders price in higher volatility in the future. The shape of the VIX futures curve, in particular, has historically been used as an indicator of future volatility levels.

Since the start of the year, investors have seen rapid shifts of sentiment in currency markets. The debasement that for so long was assumed to be a purely Western phenomenon is beginning to impact countries globally, driving changes in expected returns and growth prospects.

Despite one of the sharpest rallies in US equities in recent memory, emerging market equities have been left curiously behind in 2013. Through last Friday, the market segment was down 1.0%, compared to an S&P 500 index that was up 10.0%. This seems to violate the regime that investors have gotten used to over the past 10 years, whereby the emerging markets equity index served as a high beta proxy for the US equity market.

Surprisingly, the February employment report showed a labor market growing at a reasonably healthy rate. Concerns that the sequester would spill into the broader economy have yet to materialize and if recent trends hold, the economy may finally be approaching a point of robust and sustainable job growth.

The use of global diversification in constructing client portfolios has come under fire in recent years due to the underperformance of many risk assets. Traditionalists who stuck to their familiar S&P 500 and BarCap Aggregate Bond index blends generally outperformed their diversified peers in 2011 and 2012, as historic risk premiums failed to materialize and various alternative investment strategies faced headwinds.

Equity markets started a third consecutive year in rather impressive fashion, gaining more than 6% to date. With so much optimism in the investment community, it is always worth keeping an eye open for risks possibly overlooked. By now, it is apparent that investors are increasing their exposure towards equities with arms wide open. Data from the Investment Company Institute (ICI) estimates $39 billion flowed into equity mutual funds this year through February 13. Following outflows of $153 billion in 2012, the sudden reversal has been impressive.

For several years, investors have wondered why M&A activity has been so benign.Corporate management teams cited uncertainty about the economic outlook as a primary reason for the depressed activity.With the latest round of tax increases and revenue cuts determined, companies finally appear willing to free their animal spirits and embark on the path of acquisition.

Following recent recessions, it was commonplace to rely on American consumers to bail out the economy. The reliance on the American consumer was widely understood as the best remedy for an ailing economy. We are not as fortunate this time around and our dependence on consumers is one reason for the sluggish rate of recovery since 2008.

For the 35th consecutive month, private payrolls registered positive growth. It was hardly the robust report economists would prefer, but the labor market continues to mend. However, there are still plenty of reasons to be concerned, especially with sequestration on the horizon.

In fewer than 60 days, one country has made a splash larger than all the others. No, we are not referring to the US, where Barack Obama was re-elected to a second term. Nor are we referring to China's recent transition of power. Instead, the country we reference is Japan. After decades of malaise, Japanese officials moved to embrace policies previously only accepted by Western officials.

The European sovereign debt crisis that first erupted in 2010 and stoked almost three years of intense market volatility has all but faded from the front pages. Overshadowed by domestic policy issues and European Central Bank (ECB) President Mario Draghi's pledge to do "whatever it takes" to save the Eurozone, fears that the monetary union would crumble and unleash a maelstrom of financial distress appear to have dissipated.

Last week we discussed the debate over active versus passive management. We believe active managers can add tremendous value in particular segments of the market, despite recent challenges. Outside of the active management discussion, many investors are deciding whether equities are a prudent place to allocate capital at this point in the market cycle. The first week of the year answered investors' opinions on that question loud and clear.

There is no doubt that 2012 will be remembered by many investors, for reasons both good and otherwise. One group less likely to remember the good of 2012 is active managers. Across the universe of hedge funds and mutual funds, relatively few were able to outperform their comparative benchmarks. This continues a long running trend of active managers lagging their less active counterparts and raises many questions about the efficacy of active management.

Discussions of the fiscal cliff are capturing investor's attention, largely at the expense of trends pointing in the right direction. Year-end is synonymous with future prognostications, but current indicators suggest there is reason to be optimistic about the turn of the calendar this holiday season.

Managed futures strategies, or systematic trend followers, have long been an important component of diversified high net worth portfolios. Because of their ability to go both long and short in more than 100 global futures markets spanning equities, currencies, commodities, rates, and bonds managed futures have historically generated very uncorrelated performance to traditional investments.

Equity markets climbed higher for a second straight week, extending a rally that began November 16. For the week, the S&P 500 rose 0.6% and the Dow Jones Industrial Average gained 0.2%. In the post-mortem on Q3 earnings season, much has been made of the first quarter of negative earnings growth in three years. However, analysis by Morgan Stanley reveals an even more disturbing picture of corporate America: just 10 companies in the S&P 500 delivered 88% of the indexs earnings growth. Of those 10, four accounted for more than half and Apple alone made up nearly one-fifth of the indexs growth.

Since reaching a near-term top in mid-September, the S&P 500 Index fell more than 7%. After a 4% rally in the last five trading days, there are reasons to believe equity markets are poised to extend recent performance despite headline concerns.

As we move closer to closing the books on another earnings cycle, it is time to look back at the hits and misses for the quarter. Unfortunately, this quarter brought more misses than investors have seen in quite some time, despite a greatly reduced bar. The outlook also leaves something to be desired, with companies cutting forward guidance and analysts ratcheting down estimates for the next two quarters.

While the presidential election in the U.S. was on the forefront of most investors' minds, current events in China could be equally important to the global economy. China is going through a political transition at the same time as it seeks to re-balance its economy. Whether those efforts will be successful remains a great unknown.

Next Tuesday's election will bring some clarity to the types of policies that will shape the fiscal and economic future of America. President Obama and Mitt Romney certainly share different visions on how the US should tackle middling growth, while addressing the longer-term issues of the US fiscal deficit and seemingly unsustainable entitlement programs.

In the years since the global financial crisis, investors have funneled money into fixed income securities. This year alone, more than $260 billion found its way into fixed income mutual funds. In an environment desperate for yield-oriented solutions, such demand is not surprising. What might be considered surprising, however, is investors' willingness to embrace such yield with extraordinary risk attached.

The return of commodity inflation raises several questions, primary among them being the impact it will have on emerging markets. While rising commodity prices are generally bullish for equity prices in emerging markets, it may also inhibit central bank flexibility at a time when many developing countries are experiencing decelerating economic growth. This issue was paramount in 2010, leading to underperformance in many EM stock markets. Since then, however, commodity prices have generally moved sideways, allowing those fears to subside.

Despite the release of the September labor report on Friday, small business owners seemed to take the biggest proportion of the spotlight last week. According to the Huffington Post, Romney and Obama mentioned the phrase "small business" a total of 29 times throughout the Presidential debate. The issues and importance placed on small business are unlikely to be as cut and dry as both candidates made them seem.

Entering the final quarter of 2012, many investors may find themselves apprehensive about the outlook for markets and the broader economy. While the pace of economic disappointment appears to have slowed down and actually reversed according to the Citigroup Economic Surprise Index actual data levels continue to suggest an anemic economic state.

U.S. Presidential candidate Mitt Romney received sharp criticism this week for his comments regarding the "47% of people who pay no taxes." Regardless of one's political stance, Romney's comments were instructive in highlighting a very real problem. The notion that Republicans or Democrats deserve blame for the current challenges is shortsighted, however, because both parties were contributing members to the current legacy.