The first trading week of 2012 got off to a good start. The Nasdaq Composite, which lagged in performance during 2011, was the biggest gainer on the week at 2.7%. The S&P 500 added 1.6%, while the Dow Jones Industrial Average climbed by 1.2% during the same time.

Upbeat domestic economic news was able to trump continued uncertainty emanating from Europe. The highlight of last week was the employment data. More than 200,000 private sector jobs were added during December, which exceeded economists’ expectations. The unemployment rate also dropped unexpectedly to 8.5%. By most measures the report signaled the strongest labor market in nearly three years.

The economic news has provided some optimism heading into earnings season. Alcoa kicks off the procession Monday after the close. However, it is the retailers many will be watching. By all accounts the holiday shopping season was strong on volume. What is not known with any certainty is how much retailers had to cut prices to get customers to open their wallets. If they were able to maintain margins, then fourth quarter reports should be very good. If margins suffered, stocks of certain companies may be punished.

While the U.S. economy continues to improve, Europe appears no closer to settling its economic troubles. The flight to safety is now so pronounced Germany sold short-debt today at a negative yield. In essence banks are paying to hold German debt. The news of this coincides with data released by the European Central Bank showing a record amount of cash on hand by its member institutions. This indicates European banks are not willing to lend to each other and risk further exposure to sovereign debt troubles. The situation basically leaves Europe in a similar spot to the U.S. in 2008 when financial markets seized up. Good or bad, and nobody can know for sure how it will play out; Europe will definitely have a strong influence on the U.S. stock market in 2012.

Europe’s troubles and a Presidential election in the U.S. means there is likely to be continued volatility in stock prices this year. Investors can be whip-sawed if they try to time the market. However, long-term investors will do well investing in companies that are generating earnings growth. Fortunately this has been the case for stocks in general, and double-digit profit growth is expected for 2012. Valuations dropped in 2011, somewhat limiting downside risk. As long as companies are able to continue generate earnings expansion, investors should reap the benefits.

This week things start to heat up with the start of earnings season. In addition, there are several key reports due out this week, including the Fed Beige Book describing economic conditions around the country, December retail sales figure covering most of the holiday shopping period, and consumer sentiment figures. It is anticipated the data will indicate a continued improvement in the domestic economy and provide a positive backdrop for investors.