There are signs the economy is improving, yet there are just as many signs that we still have a tough slog ahead of us. Yesterday the stock market closed at 11,476, up 13.04% for the year. The Wall Street Journal’s front page headline today reads: “Shopping Spree Fuels Surge”. If that was all you looked at, you’d think the economy was on a roll. Yet, if you dig a little deeper, we clearly have continued economic problems that will haunt us well into next year or longer.

Unemployment continues at near 10%. The real estate market continues to struggle. Yesterday, we received a “SmartBrief” from the Financial Planning Association. It included the following report from the Wall Street Journal regarding the projected increase in foreclosures for 2011:

“The housing market reported 1.2 million repossessions in 2010, up from 900,000 in 2009, and some analysts say 2011 could be even worse because problems with the foreclosure process prevented many from being completed in 2010. High unemployment and interest-rate resets on adjustable-rate mortgages that will increase monthly payments on some mortgages will also exacerbate the problem.”

The FPA brief also noted that investors have increased their cash holdings by $1.0 trillion in the last three years. The yield on 9-month certificates of deposits is now less than liquid money market accounts. Some turned to bonds for safety not realizing that bonds will drop in value when interest rates rise. Muni-bond prices are currently dropping as investors worry about the end of the subsidized Build America Bond (BAB) program. Long-term bond yields are rising.

Municipalities and state governments are struggling. New concerns are now arising about the financial stability of Spain.

We are hopeful that the tax legislation now being considered in Congress will provide some level of certainty for businesses to help then begin to invest and create jobs. Nevertheless, the added stimulus elements of the bill worry us that Congress hasn’t yet gotten the message about our rising national debt. And just yesterday we heard about a new $1.1 trillion omnibus spending bill submitted that includes billions in questionable earmarks. It’s hard to imagine a future without higher taxes and higher interest rates. Will that lead us into the next recession?

We suggest you hunker down, cut whatever discretionary spending you can, beef up your emergency funds and make sure your portfolio is very broadly diversified. Pay off whatever debt you have and avoid chasing the latest hot assets. It’s time to be fiscally conservative and prepare for more tough times ahead.