Stock prices are undervalued and are good buys, especially those paying big dividends, says Jeremy Siegel, economics professor at the University of Pennsylvania's Wharton School.

"If it weren't for Europe I think we would be 20-25 percent higher. We're all waiting is there going to be a Lehman type of event," Siegel tells CNBC.

Will another Lehman-type collapse even occur?
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"I don't think so because I think the ECB knows it will reluctantly do what it has to do before we get to that stage," Siegel says, referring to the European Central Bank (ECB), which has resisted calls to resort to quantitative easing — asset purchases from banks — in order to stimulate Europe's financial sector and economy out of fears of fueling inflation.

Jeremy Siegel (Associated Press photo)

While U.S. stocks are cheap, European stocks are even cheaper and will bounce back once the crisis resolves.

European equities are "25 percent cheaper than U.S. stocks, which are cheap," Siegel says, adding look for dividends.

"I love dividend-paying stocks. I have always loved them. I’ve fallen more in love with them now," Siegel says.

Optimism is on the rise in the U.S.

Jobless claims fell to a three-and-a-half year low recently, fueling hopes that the labor market is finally turning a corner and on its way to better days.

First-time applications for unemployment benefits dropped to a seasonally adjusted 364,000, according to the Labor Department.

The drop marked the third straight weekly decline for initial jobless claims.

Still, continued political bickering in Washington threatens to cloud otherwise brightening skies.

"The economy is carrying some clear momentum into 2012," says Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania, according to Reuters.

"We can look forward to a better year ahead."