For the first time in months, U.S. financial markets have been able to look past the Eurozone crisis and focus on improving U.S. economic fundamentals. With the exception of this week’s disappointing jobless claims report, there is increasing evidence that the employment situation is improving. This is an essential first step to any kind of housing recovery. The housing markets remain very distressed but there are signs in specific markets (i.e. Miami) that things are starting to stabilize and/or improve. If we could get some decent policy out of Washington D.C., we could be off to the races.

Unfortunately, the political situation in Washington has not improved. President Obama just asked Congress to lift the U.S. debt limit by another $1.2 trillion, which will only take us to the end of the year when the debt limit will have to be increased again. It remains to be seen whether Congressional Republicans have an appetite for another battle on this issue now. Their decision will be based purely on presidential politics as Mitt Romney moves to lock in the nomination and begin the campaign against the president. Another debt limit battle would likely unsettle financial markets and cap any further stock market gains.

Most strategists are forecasting first half GDP growth in the U.S. at 2-3% but then have growth slowing in the second half to 1% or so. This is based on their view that Europe’s recession and a slowing China will hurt U.S. export growth. The prospects for Europe remain extremely poor and will definitely have a negative impact on U.S. growth. China’s leadership can manipulate growth to whatever level they want, but the days of double-digit growth are likely over for now. Accordingly, the U.S. has now become the major engine of global growth, a fact that is hardly encouraging in view of the fact that U.S. growth is being suppressed by the enormous weight of debt at all levels of the economy. The proliferation of so much debt is one reason why the Federal Reserve will maintain low rates for a prolonged period that is likely to last years. The problem will come when the incessant printing of money creates an inflation scare. That date is still far in the future since the U.S. economy still suffers from overcapacity in many sectors, but eventually deflation will give rise to inflation and interest rates will rise on the trillions of dollars of debt throughout the economy. All bets will be off when that happens.

The best asset classes today remain US large cap dividend paying equities and high yield bonds. There are many equities trading at low p/e multiples and paying meaningful dividends. High yield bonds are trading at spreads that more than compensate for expected defaults. Gold remains an important investment in portfolios as long as central banks continue to print dollars and euros around the clock. The gold sell-off at the end of the year was likely due to hedge fund liquidations and created a great buying opportunity. We will continue to add to our gold holdings as the fiat money system prints itself into oblivion.

Europe remains the most immediate near-term macro risk. There is little sign that anything other than Band-Aids are being applied to the crisis in the European Union. European banks still have to raise more than €100 billion of capital, which will be highly dilutive to their existing shareholders. Europe may seem stable for the moment but under the surface there are serious pressures building up. We continue to be highly cautious with our exposure in that region for that reason.

William S. Villafranco is the founder and CEO of Villafranco Wealth Management. Opened in 1995, the Montvale, NJ company is an independently owned investment boutique focused on their clients’ goals of wealth preservation and growth. With over $300 million in client assets, the firm manages the portfolios for a range of high-net worth individuals, estates, and families. Bill has over 25 years experience in finance and investing. After working for large banks and investment firms, he founded Villafranco Wealth in order to offer clients an outstanding level of personal attention and fully customized advisory services. Bill also acts as trustee for a variety of family trusts and philanthropic organizations.