The US stock market performed very well during 2013. The S&P 500s total return of nearly 33% far outpaced the returns of most asset classes. A growing contingent of market observers is fearful that the US equity market is in some sort of a bubble. We disagree completely with this notion. A strong market rally that many investors have missed is hardly sufficient grounds for a financial bubble.

Shakespearean plays follow a pattern. The underlying plots and storylines change from play to play, but the five-act construction is a common overlap. Market cycles tend to follow a similar pattern cycle after cycle. Like the different plots in various Shakespearean plays, the catalysts that begin and end each cycle, and the events during the cycle are always different. However, market cycles seem to follow a script and, so far, this cycle seems to be following the script almost perfectly.

Each December we publish a list of investment themes that we feel are critical for the coming year. We continue to believe the US stock market will continue its run through one of the largest bull markets of our careers. Our positive outlook extends to the following areas: US Equities, Japanese Equities, European small cap stocks, high yield municipals.

We remain very concerned about emerging market stocks and bonds. The recent outperformance of EM stocks is again luring investors to once again touch the hot stove. Emerging markets seem to have some significant structural and cyclical issues about which investors seem unaware or seem to be ignoring.

We find it incredible that the government is, once again, on the verge of a default on US debt. Although we doubt that the US will actually default, it is unfathomable that elected officials would even consider such an event. Worse yet, some officials apparently believe that a default might benefit the US.

Most investors will readily admit the global credit bubble is deflating, yet continue to favor credit-based asset classes within their portfolios. Whereas many investors still believe that the emerging markets are a growth story, the data tell us that U.S. investors can find growth in their own backyard.

We have been ardent bulls on the Japanese stock market since last Fall. Our thesis has been a simple one: For the first time in the history of our data, Japan began running consecutive monthly current account deficits.

If SNLs Emily Litella worked on Wall Street, shed probably be asking Whats all this hubbub about the Feds tapir? After all, its a fine animal that never hurt anyone on Wall Street. It would then be pointed out to her that the word was taper and not tapir. She would politely end her commentary with her famous Never mind.

The phrase "Great Rotation" has come to mean a sizeable shift in asset allocation from bonds to stocks. We, too, believe that stocks are likely to secularly outperform bonds, but we dont think that is the "great rotation" about which investors should be concerned.

The Fed is likely to lag the markets, as they do in most cycles. The markets will probably anticipate the Fed reversing QE. The Fed will surprise few investors. The Fed should reverse QE in a yield curve-neutral way, in our view. Steepening the curve risks perversely stimulating the economy by making carry trades and loan spreads more profitable. This cycle will probably end as do most cycles. The Fed will be behind the curve, play catch-up, tighten too much, invert the curve, and cause a recession. That end result, however, is probably quite far in the future.

We have thought for some time that the current bull market might be one of the strongest of our careers, and could potentially rival the 1980s bull market. Although this current cycles construction is quite different from the 1980s bull market, there are many aspects of this market that are curiously similar.

Politicians crave the spotlight, but it is unfortunate that investors watch the show. 2012, like 2011, was another year in which Washington theatrics scared investors. As a result, investors largely missed out on above average equity returns. Corporate profits and valuations, and not Washington, continue to be the primary drivers of equity returns. We think there are several important points to consider when reviewing 2012 performance, and when structuring portfolios for 2013.

Politicians love the spotlight, but it is very unfortunate that investors watch the show. The drama of the so-called "fiscal cliff" has scared investors, and led them to miss a very good year in the equity market (the S&P 500's total return was 16.0% during 2012 versus the long-term annual average of 11.8%). It appears as though Washington wants to continue to dominate the headlines, which means that it may be more important than ever for investors to downplay Washington's theatrics.

Each December we publish a list of investment themes that we feel are critical to the coming year. We continue to believe that US equities are in the midst of a major bull market that could ultimately rival 1982's bull market. It is hard to be bearish when one considers the following.

The "American Industrial Renaissance" remains one of our favorite investment themes. We prefer to implement this theme through small US-centric industrial companies and small financial institutions that lend to public and private industrial firms. It is unlikely that the United States will again be the manufacturing powerhouse that it was during the 1950s and 1960s, but many factors are suggesting that the US industrial sector will gain market share over the coming decade.

Investors have the impression that bull markets are days of wines and roses. However, nothing could be farther from the truth. Bull markets are periods of fear. This becomes quite obvious when one examines the valuation and sentiment data associated with the 1982, 1990, 1995, and 2003 bull markets.

If one searches in Google for Does buy-and-hold work?, more than 191 million results will appear.If one searches for Is buy-and-hold dead?, more than 81 million results will appear.However, if one searches for Successful buy-and-hold strategies, only about 9 million results will appear.Its pretty clear that the investing world believes that buy-and-hold strategies are basically dead and gone.

We continue to prefer smaller, US domestic banks to larger, multinational banks. A backdrop of anemic yet improving US employment and stabilizing housing markets will likely benefit domestic lenders, but the continued deflation of the global credit bubble could continue to hurt the growth prospects for global financial institutions. Although the vast majority of the risks related to the deflation of the US credit bubble seem well-known, investors still appear to be underestimating the risks of credit deflation in Europe and in the Emerging Markets.

Investors seem overly concerned about US inflation. Both market-derived expectations and actual rates of US inflation remain very subdued, yet we are consistently asked about inflation and whether our investment strategies are adequately structured for high US inflation. Across the board, these data do not support structuring investment strategies for the US inflation that investors, oddly enough, feel is inevitable. The data do, however, suggest that investors recent rush into emerging market debt is much riskier than they anticipate.

Our firm believes three principles build long-term wealth: Extend the investment time horizons. Compound dividend income. And truly diversify portfolios. Although obvious, few investors actually follow them consistently. In particular, we remain quite concerned that investors appear grossly under-diversified. Diversification is not dependent on the number of asset classes, but rather it depends on the correlations among those asset classes. Because correlations among asset classes have been so high, investors must be extra careful to ensure portfolios are indeed well-diversified.

Negative earnings surprises are on the rise in the US: over half of the S&P 500 has reported and 30% of the companies have reported negative earnings surprises versus a long-term average of 24%. However, negative earnings surprises are significantly higher outside the US. Additionally, recent economic data suggest that a revival of the US household sector may be underway. We expect the secular outperformance of US assets to continue.

The market generally proves the consensus wrong, and 2011 certainly adhered to that historical precedent because the consensus "must owns" at the beginning of 2011 generally underperformed during the year. What is somewhat startling to us, however, is that conviction has yet to be shaken. The consensus continues to favor commodities, emerging markets, and "any-bond-but-treasuries".

Assessing the prospects for a coming twelve-month period is always a challenge. We rely on our broad arsenal of fundamental barometers for profits, sentiment, momentum, and our cyclical indicators to help us identify whether markets are correctly aligned relative to their economic and profits cycles.

It remains a mystery to us as to why investors believe each cycle is different from other cycles. The title of a very popular book right now is "This Time is Different" Some cycles are stronger and some are weaker, and some cycles last longer than others. However the investment implications at different points in the cycle remain remarkably consistent. With the exception of bubbles, we have yet to come across a truly 'different' investment cycle. Most important, the typical rotations within the global financial markets are following their normal pattern even during the current cycle.

The consensus over the past month of so was that Washington would come to a last minute debt limit resolution and the equity markets would rally once the cloud of uncertainty regarding the US's finances was removed. Washington did come to its last minute resolution, but the markets have sold off. What happened?

The overwhelmingly bullish consensus regarding the emerging markets should be worrisome to even the most stalwart enthusiasts of emerging markets. It's hard to believe that the consensus a decade or so ago was that the emerging markets were terribly risky and should be avoided. Today, emerging markets, and ancillary asset classes like commodities, have become the cornerstone of most investment strategies.

Tail risk, as the name implies, is the risk of a highly unusual event occurring. A tail risk is often defined as an event occurring that provides a negative return at least three standard deviations below the average return. We doubt that the peak in the current stock market cycle is likely to occur when hedging tail risks is so common. After all, no one discussed tail risks at the market peaks in 2000 or 2007. Just like in previous cycles, the ultimate stock market peak will likely be accompanied by levered investments, rather than by hedged investments.

BRIC yield curves are on the brink of inversion, while the US has the steepest yield curve in the world. Such signals, while certainly not infallible, have historically been reliable predictors of future equity returns, but investors? portfolios nonetheless remain generally overweight emerging markets and underweight the US. We see opportunity in this disconnect.

It is hard to find anything in the current financial landscape that has caught investors? attention as much as gold. We were proponents of gold at times over the past decade. However, the rationale for investing in gold has changed in the last three years. The story was once a fundamental one, but today?s general enthusiasm seems more emotionally-based. Gold prices might rise further, but we prefer to sit out the current rally in favor of more fundamentally-based investments that tend to perform well during periods of sizeable nominal growth.

Hearing the phrase ?this time is different? is often a warning signal. History demonstrates that rationalizing an overvalued market by suggesting that the economy has structurally or that we?ve entered a ?new paradigm?, is not generally a fruitful strategy. Whether bullish or bearish, we believe that macro cycles rarely diverge from historical patterns. Indeed, current global economic cycles appear to be following historical trends. However, there appears to be a significant disconnect between investor sentiment regarding risk and where problems are actually emerging within the global economy