The recovery from the "Great Recession" continues. While not yet a "Great Recovery," the outlook is pointing to a stronger recovery than previously predicted. Morningstar 4/3/10: "Indicators Uniformly Bullish.” Improvements in jobs and housing could accelerate the economic and market recovery. The equity market outlook is very good, however the bond market may be at higher risk.

Corporate profits are no longer just from cost-cutting, but also now from revenue growth. There will be daily volatility based on daily news, but the outlook for 2010-2011 seems the strongest in years.

Although the outlook is favorable there are market risks. We have added alternative opportunities without either stock or bond market risk for maybe a 10%-30% more stable base to a portfolio.

Zacks expects S&P500¹ earnings to jump 31% in 2010 and 20% in 2011. Earnings will still be below pre-recession levels. "Stocks look very attractive." (Zacks Earnings Trends 4/6/10).

Of course we do not recommend "dumb" index funds but management teams that consistently beat index returns with a long history of out performance vs. risk taken. There are also opportunities other than companies in the S&P500 index.

"Lots of investors missed most of the rally as they poured into bond funds. Now we are starting to see fund flows back to equities.  Corporate earnings and cash flow has been incredibly impressive and it looks like it is going to continue. So that gives investors some confidence to continue to move assets into the equity markets." (CNBC Closing Bell 3/26/10)

Wall Street Journal (WSJ) 4/13/10: Intel earnings and revenues widely beat estimates - its best first quarter in history with return of business and consumer spending on technology. "We're really seeing demand in all regions of the world improving." said CFO of Intel.

Morningstar 3/27/10: "Rate woes won't derail the recovery. The economy is strong enough to tolerate somewhat higher interest rates."

Kiplinger 4/1/10: "Businesses are sitting on a cash trove...$2.8 trillion for nonfinancial firms."

WSJ 4/7/10: “With trillions (of cash) on the sidelines, there is fuel to move markets higher.”

WSJ 4/13/10: “CBOE Volatility Index, commonly called a ‘fear gauge,’ hit its lowest level since July 2007, before the market turmoil began.” 

WSJ 4/9/10: “Shoppers opened their wallets even wider than expected in March, snapping up spring fashions and home furnishings and paying full price for much of what they bought.”

BusinessWeek 4/12/10: "As Recession Fades, Americans Head to the Mall"

Commerce Dept. 3/29/10: New orders for manufactured goods were up again for the third straight month. Durable goods orders in March were at their highest levels since November 2008 and ISM’s Manufacturing Index hit the highest level since 2004. The ISM Service index for March showed the strongest growth since 2005.

The global economy is recovering but at different paces, with emerging economies - especially those in Asia - experiencing strongest growth. Much of the growth is from Asian domestic demand due to higher incomes.

Bloomberg 3/29/10: "South Korea’s biggest port, overwhelmed with empty containers a year ago, is now dealing with shipping lines that have more cargo than they can carry. (Due to) surging shipments of furniture, electronics and clothes to the U.S. and Europe.”

WSJ 4/7/10: “There is a global growth story, which is revolving around China but includes Brazil, Canada, Australia, and many parts of

Eastern Asia. There is also strong positive momentum developing in India, and cash is once again piling up in the sovereign wealth funds of the oil states of the Middle East. That growth is generating cash, which is looking for return.”

“With leaner inventories than the world has ever known and sparser workforces, companies can make profits even when national economies sputter.”

“None of the reasons why markets are likely to move up depend on a strong U.S. economy or robust growth in Europe. The jarring contrast between how companies and the overall economy are faring may yet produce a populist backlash, especially if unemployment lingers at 10%. But for now, there is little standing in the way of markets, and much to propel them forward.”

Japan’s outlook remains challenging with deflation, as consumer prices declined for the 11th straight month. Bank of Japan expects deflation to continue through 2010. Exports remain strong; however a shrinking labor market keeps domestic demand weak.

In Europe the labor market weakened much less than in the U.S., as shorter work weeks limited job-shedding. The lack of job losses resulted in lower profits for many companies as sales declined faster than cost-cutting by layoffs.  This is the opposite of U.S. companies, which quickly laid off employees and more quickly reduced costs.

European recovery may also come quickly - as manufacturing rose to the highest level in 15.5 years in the U.K., Swiss manufacturers expanded at the fastest rate in three years in March and Denmark's unemployment rate fell unexpectedly to 4.1%, as reported in early April.

In the U.S. and most of Europe, policymakers provided significant monetary and fiscal stimulus that avoided a repeat of the Great Depression.

The challenge is the timing of getting back to more neutral policies and having tax revenues increase or spending reductions to reduce the unsustainable level of deficits.

U.K. raised its income tax rate to 50% on over £150,000 and has a 50% tax on banks for banker bonuses above £25,000 to repay their bailouts.

 “There are some banks who still believe their priority is to pay substantial bonuses,” (Alistair) Darling said in Parliament. “I am giving them a choice. They can use their profits to build up their capital base. If they insist on paying substantial rewards, I am determined to claw money back for the taxpayer.”

Wealthier taxpayers were also hit with a clarification of pension rules. In 2011 the tax for the National Insurance will be raised by 1% from the current about 11%, depending on income.  In 2011 the value-added tax will increase from the current 15% to 17.5%.

²Additional risks are associated with international investing (especially in developing countries), such as currency fluctuations, political and economic stability, and differences in accounting standards