S&Ps downgrade of nine euro zone countries, including France, is likely to dial up investor anxiety, but its important not to let a short-term bout of pessimism KO your long-term financial goals, writes Kristina Hooper, head of portfolio strategies at Allianz Global Investors.

An improving job market and increased manufacturing activity suggest a stronger economy, but the housing sector remains weak. However, low interest rates, less debt and more affordable homes could turn housing into a positive catalyst.

The stock market finished flat for the year, but an absence of loss in the face of a wave of negative news coupled with improving economic conditions are cause for optimism in 2012. While the stock market took us on a wild ride to nowhere, investors are better off than they were a year ago.

The euro zone will continue to struggle as fiscal dieting and debt reduction are likely to mean slim chances of economic expansion, but strong consumption trends in emerging markets may temper their ill effects. The European Central Bank (ECB) is at the heart of market solutions to the European Union (EU) crisis but stands resolute against printing money to alleviate debt. Despite the ongoing crisis, there are many growing and profitable opportunities for European corporates especially in emerging markets.

Jitters over Europe's debt crisis once again sent investors fleeing despite mounting evidence of economic expansion in the U.S. While the Fed has prudently kept interest rates at historical lows, an explicit call to action for investors is needed.

Continued volatility in early 2012, but an increasingly accommodative monetary policy globally could jumpstart growthparticularly among export-driven companiesin the second half of the year. Energy and health care sectors stand out as likely outperformers.

The loosening relationship between US and European economic growth and what it portends for US stocks and investors. Decoupling never seems to go out of vogue in America. Britney and K-Fed. Ashton and Demi. Arnold and Maria. Kris Humphries and a Kardashian. Elizabeth Taylor and just about everyone. But right now were seeing a differentand decidedly more positivekind of breakup: the US economy is decoupling from Europes economy. While strategists are increasing the odds that Europe goes into recession, they are decreasing the odds that the US will go into recession. And with good reason.

We are clearly facing a significant slowdown in economic activity in 2012, but we do not expect most developed economies to fall into recession. However, growth risks are increasingparticularly in Europe, where a recession is becoming increasingly likely. We do not expect a return of deflationary fears despite weakening growth, nor is inflation likely to be a threat in the foreseeable future. We expect rates to come down further in the euro zone and emerging markets; in the U.S., U.K. and Japan, we expect extremely low interest rates to continue.

Stocks have been acting like a pack of zombies this year: wandering around aimlessly, frightening off everyone, but not really getting anywhere. However, recent data suggest an awakening.

Despite a turkey performance from the stock market last week, U.S. investors still have a lot to be thankful for, namely a doubling of corporate profits in the last three years, improved labor market conditions and surprisingly strong consumer spending.

Stocks retreated despite positive economic news, suggesting even tangible proof of recovery may prove too little to overcome investor fear. With higher volatility over political handwringing expected, investors can exploit likely buying opportunities. Indeed, anxiety occupied Wall Street last week and trading was decidedly risk off: The S&P 500 gave up almost 4% and the Dow Jones Europe Index lost 5%, while the 10-year Treasury was driven down to 2.01%. But stock market performance belies an improving economic picture, a condition best illustrated by the latest government data.

There is continued disparity between investor moods and a healthy corporate America. A vicious tug-of-war between positive economic data and negative news formed the backdrop for another tumultuous week in the financial markets. The tiebreaker was a more optimistic take on Europes ability to solve its debt problems, which enabled stocks to finish the week on a positive note with the S&P 500 gaining less than 1%. Looking at the stock market's progress so far in 2011, it has been a similar tale: volatility with little to show for it. The S&P 500 is up a modest 0.5% year to date.

Stocks gave back gains last week with help from Europe, but there are ample reasons to stay upbeat on equities: 7 out of 10 U.S. companies are beating earnings estimates so far in the third quarter, and the private sector continues to add jobs. Stocks finished the week downbut definitely not outas a strong earnings season is cause for optimism in the face of a pervasive European debt crisis.

The Feds Beige Book, which provides a more holistic view of the economy than any individual data point, confirmed what weve seen in recent economic reports: the U.S. economy grew slightly in September and the first week of October. Also positive were the latest industrial production numbers: U.S. industrial production increased for the third straight month helped by rising demand for autos, planes and electronics. This offers further evidence of a disconnect between sentiment and dataone that could spell opportunity.

Surprisingly strong economic data shows a weakening link between investor attitudes and economic realities, suggesting fears of a recession may be overstated, writes Kristina Hooper, CFA, CIMA, head of portfolio strategies at Allianz Global Investors.

For decades, investors largely ignored the commodities segment. They can no longer afford to. Commodity production can scarcely keep up with the dynamic development in global demand. The supply bottleneck could remain a sustainable driver of higher commodity prices for the foreseeable future. This applies to energy, to commodities in general and agricultural products in particular: these resources are becoming scarcer?and this is a megatrend.

China has replaced Japan as the Asian economic champion, causing some to suggest that China will follow many of the steps taken by Japan during its economic emergence. Dr. Mark Konyn says the dynamics of the relationship between China and Japan are critical for Asian prosperity.

Christina Chung?head of Chinese equities at RCM, an Allianz Global Investors company?sees few signs of a hard landing in China, as inflation concerns have likely already been discounted by the country's equity market. The latest figures show that China's GDP rose to 9.7% year-over-year in the first quarter of this year, meaning that growth was slightly higher than the market consensus of 9.4%, but slightly lower than the 9.8% in the previous quarter. For the first time in history, the Chinese National Bureau of Statistics (NBS) has issued a comparison with the previous quarter.

India is widely assumed to have huge catch-up potential compared with China. Yet while China?s centrally guided economy swiftly executes structural changes, India generally discusses structural reforms without executing them. Michael Konstantinov?BRIC investment style leader for RCM, an Allianz Global Investors company?recently returned from India and discusses promising changes that, finally, are just about to be implemented.

Scott Migliori, CIO of RCM U.S., of Allianz Global Investors?says U.S. equities should continue to receive support from stronger corporate profits, a high level of new orders, favorable taxes and rising capacity utilization rates?which should also boost capital spending. We believe a 2011 full-year S&P 500 earnings growth rate close to 12%?15% is attainable. Profit margins are high and vulnerable in some sectors. Unit labor costs are to remain well behaved with the unemployment rate likely to remain above 8%. We believe 2011 S&P 500 earnings can reach the $95?$96 range, with an 9% gain 2012.

Both Republican victories during the midterm elections and the second round of quantitative easing could result in market gains. A perceived mitigation in government intervention has typically been received favorably by equity markets, and could especially benefit investor sentiment in areas that had previously received the greatest amount of government scrutiny, such as health and financial services. Furthermore, if successful, renewed quantitative easing could increase both consumer and business confidence and result in better than forecast nominal GDP in 2011.

RCM's outlook for 2010 remains positive, with some prospect for a year-end rally and the market up at the lower end of 5 percent to 10 percent. Expectations of quantitative easing by the Fed, the election season and the earnings season may create some short-term volatility.

For investors still wary of stepping fully back into U.S. stocks, convertible securities - which possess both equity and bond features - may be a prudent way to participate in potential stock upside while also defending against market volatility. With economic growth and corporate profitability slowly but steadily picking up steam, the prospects for convertibles may be particularly attractive now. At the same time, their diversification and total return benefits make them an appropriate allocation in a long-term portfolio as well.