The S&P 500 has gained just less than 5 percent year to date, but one could hardly characterize its trajectory as “upward.” On two separate occasions–first in March and then in mid-June–sudden shifts in investor sentiment all but wiped out the S&P 500’s total gains, before the index rebounded sharply over the following weeks.

International markets haven’t been subject to the same dramatic swings, but market volatility has been the watchword of the year among investors. We live in an interconnected world, that there’s a lot to worry about in the world today.

The European sovereign debt crisis continues to roil global markets; the Europe Stoxx 600 index recently fell to a four-month low and Spanish and Italian borrowing costs have risen to all-time highs. The credit default swaps–a sort of insurance policy against default–for most of Europe’s peripheral nations have blown out as worries of a default intensify. Those concerns were further exacerbated earlier this week when the Dutch Finance Minister said the European Central Bank (ECB) was mulling a selective Greek default–in which the ECB would decide which creditors would be paid and how much they would receive.

Washington is embroiled in a contentious debate over whether to raise the nation’s debt ceiling while reducing the federal deficit. The Federal Reserve’s second round of quantitative easing has come to end, leading many to predict a steep drop in both equity and commodities prices. The US employment situation remains dismal, as most companies are wary of making new hires amid economic and political uncertainty.

Technology bellwether Cisco Systems (NSDQ: CSCO) recently announced that it may trim as many as 10,000 jobs to boost profit growth. With second-quarter earnings growth expected to come in at its slowest pace in two years, many fear that another wave of job cuts could be in the cards.

This confluence of events and negative sentiment has prevented the domestic economy from gaining traction. They also mean that record-low interest rates are likely here to stay.

In Asia, Japan is recovering from the earthquake and tsunami that struck the country in March. Although industrial production is steady improving, disruptions to the supply chain continue to dog the country’s electronics industry and will limit GDP growth this year to an estimated 0.4 percent. Meanwhile, China continues to battle inflation. The consumer price index rose to a three-year high of 6.4 percent last month, despite government measures to slow credit creation.

The array of threats to the global economy has weighed on markets and the Global ETF Profits model Portfolio, which has returned 2.3 percent this year through June. But many of these concerns will abate as the year progresses.

Settling upon a true solution to the European sovereign debt crisis will take time. But the combination of austerity measures and continued support from stronger EU members and international organizations such as the International Monetary Fund should achieve the desired results. The financial press may be breathless over the prospect of a default in the region, but that risk appears to be priced into the market. Most analysts already believe that some version of a selective default event will occur.

With regards to Asia, inflation in China is likely to peak soon and moderate in the back half of the year. Even Japan–which still faces a long road to recovery–has seen industrial production rise over the past two months, which has jumpstarted exports. With domestic demand expected to pick up as the consumers find their footing, Japan’s GDP growth is forecast to come in at about 3 percent next year.

The situation in the US isn’t as dire as one would expect from reading the daily headlines. However, 2012 is a general election year and the political environment has grown more rancorous than usual. These factors make it difficult to make macro-level assessments;  attempting to predict the whims of politicians is like trying to nail Jell-O to wall.

Despite the rhetoric on both sides of the aisle, history suggests that House Republicans and President Obama will strike a compromise on the debt ceiling and deficit reduction. No side will be entirely happy with the results. That compromise will likely entail a smaller long-term reduction in federal spending, leave entitlement programs mostly intact and, crucially, avoid a US default. That, in turn, will allow the credit ratings agencies to maintain a sovereign-AAA rating on US debt and allow business to continue as usual.

Global Positioning

Investors have fled to safety amid the global turmoil. The Income & Hedges portion of the Global ETF Profits Portfolio has been our top performer, posting a 3.4 percent overall gain. Shares of SPDR Gold Trust (NYSE: GLD) have risen 5.3 percent year to date, for a total gain of 38.3 percent since we added the ETF to our Portfolio in March 2010. Market Vectors Emerging Markets Local Currency Bond ETF (NYSE: EMLC) has jumped 3 percent this year as investors have reached for yield. The fund has also benefited from a weak dollar.

We expect the global economic climate to improve in the second half of the year. However, we expect the holdings in the Income & Hedges Portfolio to be our top performers through the summer. All Income & Hedges picks remain buys up to the prices listed on our Portfolio page.

For those with a stomach for volatility and the ability to view short-term corrections as buying opportunities, the emerging markets remain the place to be. Growth prospects in emerging markets remain strong and valuations are attractive.

Additionally, iShares Dow Jones US Oil Equipment Index (NYSE: IEZ) has been one of our top performers this year, posting a 13.5 percent gain. We believe greater upside remains. The stocks of a number of oil producers sold off after the price of oil dipped below $100 per barrel. That’s caused a minor sell-off in oil-equipment names. Many investors seem to believe that lower oil prices combined with fixed drilling costs translates into lower profits.

But the long-term reality is that oil prices should rebound above $100 as demand continues to pressure supply. With production in Libya all but ground to a halt, spare capacity is scarce. But developing markets continue to experience growing petroleum demand, as indicated by rising auto sales in these countries.

Buy iShares Dow Jones US Oil Equipment Index below 68.

We remain extremely bullish on Guggenheim China Real Estate (NYSE: TAO). The ETF has declined by 2.3 percent this year, but has gained 8.3 percent since our initial investment.

That underperformance has been caused partly by recent accounting and fraud scandals at Chinese companies, particularly those that have tapped the US market with reverse mergers. Checkered corporate governance is a legitimate risk in China, but most of the companies held in Guggenheim China Real Estate’s portfolio are based in Hong Kong and have been operating for decades. These stocks are widely held by institutional and individual investors alike, and their financials have been vetted by hundreds of analysts.

Additionally, the reports that enterprises were relocating en masse to Singapore from Hong Kong due to the high cost of office space appear to be exaggerated. Hong Kong remains the gateway to mainland China. Hong Kong also offers a higher standard of living than Singapore, so few executives are willing to relocate. Furthermore, the Hong Kong dollar is pegged to the greenback and interest rates in Hong Kong have remained artificially low, which continues to drive real estate demand in the city-state.

Continue buying Guggenheim China Real Estate below 24.