In terms of the economic data, the news continues to improve.  Economic growth has not been robust but but it has clearly been positive, and improving.  The chart below shows the path of Global Industrial Production following the past three major recessions (1974-75, 1981-82 and 2008-09).  In each case we saw a strong initial rebound following the end of the recession as inventories were rebuilt and consumers satisfied ‘pent up demand’ for basic goods.  These impacts lead to peaks in Global IP less than a year after the end of the recession (May 1976, Feb. 1984 and April 2010) at which point growth moderated into a slower ‘expansionary’ phase versus the more robust ‘recovery’ phase.  What can be clearly seen in the chart is that the current cycle (blue line) is really no different from prior cycles and that the moderation in growth last year was nothing out of the ordinary, particularly when we realize that the Japanese tsunamai and the European debt crisis pushed growth even lower than it otherwise would have been.

Global Growth Profile - Similar to Past Recoveries

Investors were factoring in a very negative economic outlook in 2011; clearly this has gotten better this year but is a long way from robust.  The same goes for the earnings picture.  While the 4th quarter/2011 earnings reports coming out over the past few weeks have been good, they have not been the ‘blow away to the upside’ type of numbers that we have gotten used to in this recovery.  While some big players like Caterpillar, Apple, IBM and Microsoft all substantially exceeded expectations, GE, Alcoa, JP Morgan and Google all either missed expectations or guided to lower numbers in the 1st quarter than most investors expected.  Some of this impact is seen in the chart below, which shows that earnings have basically come in line with expectations overall, as opposed to the prior ten quarters following the recovery in the 2009, where earnings beat expectations by an average of over 5%.

Q4 Earnings in line with Expectations

However, this still means that earnings are growing at double-digit rates over the past year, a far better number than the current low level of stock valuations would have us expect.  With stocks trading at historic low levels and the spread between stock earnings yield and bond yields at the highest level ever, it seems that investors have been preparing for something far worse than the current earnings numbers would indicate.

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