Quarterly Questions

Friday brought down the curtain on 2012’s first quarter. It’s important to keep in mind quarters are just as arbitrary markers as months or even calendar years—but it’s still worthwhile to occasionally pause to reflect back before looking forward once more.

And what happened in Q1? Long-discussed and feared, Greece finally underwent a massive restructuring of its debt. Markets largely yawned—they’d had a long two years to price in the event. And it was very orderly. Private participation exceeded expectations, highlighting that the commitment to resolve Greece’s debt problems while preventing as many deleterious side effects as possible extends beyond just those in elective office.

Though Greece has largely hogged media attention, the country with the biggest debt hurdles in 2012 by a wide margin is Italy. As the quarter closes, Italy’s conducted a number of successful bond auctions—all at relatively benign rates (especially compared to recent highs in 2011) and decent demand. By the end of April, Italy will be past a big bulk of its 2012 financing—it seems likely auctions continue to go fine (and much better than was feared just a few months ago).

Media attention largely shifted through the quarter to others—like Spain and Portugal, broadly expected to be the next dominoes to fall. Yet, just Friday, Portugal announced it will beat its 2011 deficit target. Spain’s arguably seen more mixed results, some politically painful, in meeting deficit targets and implementing austerity measures necessary for achieving those goals. Though yields have ticked up recently at Spanish auctions, they remain well below peak levels seen late in 2011.

As for economic data, though every measure is volatile, overall and on average, economic metrics globally continue ticking the direction you’d want to see—manufacturing and services indexes generally up, unemployment generally down. Incomes keep rising. Personal spending remains at all-time highs and grew again in February, beating expectations. Business capex keeps rising. Globally, Japan saw some particularly strong data this quarter, pointing to a pretty strong rebound from last year’s natural disasters. For Financials, the Fed released stress test results that showed overall healthy US banks with comfortable capital ratios—and the list goes on.

Taken together, though there are pockets of weakness (always true), the actual storylines paint a picture of ongoing global expansion—one where corporate earnings seem likely to continue growing. Not at the torrid pace we saw early in the expansion—but we’re past that early recovery stage now, and slower earnings growth is normal and healthy at this point.

As ever, such an analysis is backward looking. But in our view, it suggests the world has ample fuel for ongoing demand, earnings should be healthy and stock valuations have room to rise. As we said at the beginning of 2012, we expect this year to be a big one for stocks—the fourth year of a bull that was refreshed by a sideways, choppy 2011.That remains intact.