The third quarter saw the Dow and the S&P posting their best quarterly results since 1998, and the economy continuing to show signs—although uneven at times—of recovery. We believe that the third quarter will post positive U.S. gross domestic product (GDP) growth that will continue into the fourth quarter. With growth returning both in the United States and around the world, we remain optimistic on the near-term future of the market.

We would not be surprised to see occasional selling surges, such as those seen in recent days. However, we believe that those dips will likely entice investors who are still on the sidelines back into the market—helping to keep any pullback relatively limited.

Fiscal and monetary policy will become increasingly critical influences on the development of the economic recovery. The winding down of the mortgage support, combined with the reiteration by the central bank that it would end its $300 billion support for the Treasury market by the end of the year, is at least the beginning of the so-called "exit strategy" by the Fed.

While we believe it's clear that the US economy is not yet ready to operate completely free of support, it's important that both the Fed and the federal government begin to wean the economy off life support.

“It's critical that the economy become self-sustaining, but the pace at which stimulus is withdrawn will be key. Too fast, and we risk being pushed right back into a recession. Too slow, and inflation might emerge,” says Liz Ann Sonders, Chief Investment Strategist, Charles Schwab & Co.

Overall, we would like to see a reduction in borrowing at the federal level by letting the existing programs run their course and expire as currently scheduled.

Unfortunately, spending is not the only area of policy that we're concerned about. The increasing call for tighter regulations could begin to stifle free market action and innovation while history has proven that protectionism—which seems to be creeping in with the recent imposition of tariffs on Chinese tires—generally doesn't help an economy.

Finally, housing remains central to the recovery process. Affordability remains near all-time highs, inventories are declining, and price declines are moderating. Questions still surround the residential market, however, and we believe that there could be another down leg as the "shadow inventory" (those who've wanted to sell their houses but have delayed due to poor market conditions) comes onto the market.