Although a correction remains a possibility, we believe the U.S. equity market has not yet fully discounted the potential of even a modest uptick in the demand side of the economy, keeping us optimistic on the market's prospects as we move through the fourth quarter.

After a disappointing jobs report helped push the market lower, we saw a nice reversal on better-than-expected economic reports—a trend we believe will continue. Additionally, wholesale inventories fell for a twelfth straight month in August while wholesale sales rose 1%, leading to inventory/sales ratio falling for the fifth month in a row, dipping to its lowest level since September 2008.

Add to that the recent retail sales data that showed a 0.4% gain in September's year-over-year same-store sales (the first gain in a year), and you can start to see the components coming together for a renewed rally.

We don't expect a sharp increase for the market as sentiment has become somewhat extended and there will undoubtedly be some economic data points that disappoint, leading to dips in performance, much like we saw at the end of September. However, these dips could be relatively shallow and short in nature, and represent an opportunity for investors who need to raise equity allocations up to target levels.

As well as economic data, we are also closely tracking signs of future shifts in monetary policy. Getting the economy to a self-sustaining phase and removing the excess liquidity before inflation takes hold are both critical challenges facing the Central Bank.

At its last meeting, the Federal Open Market Committee (FOMC) members declined to expand both its Treasury and mortgage-backed securities (MBS) programs. We believe that they will continue to slowly extricate themselves from their unconventional policies and watch the economic and market reaction as they do so. Although the first rate hike might not be immediate, we believe that it will be sooner than many are now expecting.

“Rates are now effectively zero, so even a rise of 50-100 basis points would leave rates historically low and still stimulative. We believe the Fed could begin raising interest rates in the first half of 2010,” says Liz Ann Sonders, Chief Investment Strategist, Charles Schwab.