Just when you thought it was safe to forget about Europe’s debt woes for awhile, politicians in Greece are doing their best to snatch defeat (or is it default?) from the jaws of victory.

Global financial markets rallied last week after European Union (EU) finance ministers apparently struck a deal to address the spreading debt crisis.

The plan is designed to deliver more financial life support to Greece while preventing the crisis from deteriorating any further ― at least for now.

But yesterday a new twist in the Greek drama emerged as the country’s prime minister suggested the Greek people should get a referendum on the bailout plan.

All those in favor of voting for more austerity measures...?

This just highlights the fact that financial markets continue at the mercy of breaking news out of Europe. As investors, it’s easy to get side-tracked by these daily developments, and of course it’s always the negatives that lead on the nightly news.

But as investors with a time horizon longer than the next five days, you should take into account the bigger picture positive developments we’ve noticed in recent weeks.

As you can see in the graph, even before the EU debt crisis deal was announced, US economic indicators were showing signs of steady improvement, but preoccupation with the EU debt crisis has overshadow these positive developments.

This graph exhibits the Citigroup Economic Surprise Index, which tracks both positive and negative US economic data reports. An uptrend in this index since June is a clear sign the majority of economic news has been positive, outpacing fewer negatives.¹

Let’s take a closer look at the details.

EU Debt Deal … or Debacle?

Granted, last week’s EU debt deal was no game-changing event. The plan lacks some important details and we all know that’s where the devil resides.

It certainly doesn’t solve Europe’s long-term debt issues, but at least it’s a step in the right direction, featuring a 50 percent “haircut” of Greek government debt. Yet to be decided, however, is exactly how the plan will be funded and the timetable for implementation.²

Then the news surfaced of a Greek referendum on the bailout plan … which raises the specter of uncertainty all over again.

Still, it appears EU finance ministers have finally begun to realize the reality of this situation and are proposing more creative and comprehensive solutions to the crisis. The 50 percent write-down in the value of Greek debt is one necessary step.

Another positive: The financial firepower of the European Financial Stability Facility is being increased significantly, to $1.4 trillion, which should help shore up troubled EU banks, helping to avert a meltdown of Europe’s financial sector.³

Above all, if successfully implemented, this plan should help alleviate one of the biggest fear factors hanging over the global economy and financial markets.

Corporate Earnings Come Through Again

Meanwhile, back in the US, corporate profits topped forecasts for the tenth straight quarter.

More than 70 percent of companies in the S&P 500 Index are beating third quarter earnings estimates⁴…

Profits rose 16 percent on average, while top-line sales growth is also exceeding expectations …

What’s more, positive surprises are ahead of forecasts by a strong 5.5 percent, much better than average.⁵

But here’s what you probably didn’t hear from the mainstream financial media…

Lost in the sound bites about how many S&P 500 companies beat earnings estimates or by how much … is the rest of the story. It is the story we’re hearing directly from management at the companies we own in our Banyan core equity portfolios, and for the most part, they continue to report very strong business conditions.

At Caterpillar (NYSE: CAT), for instance, economic uncertainty has yet to show up in the company’s new orders for heavy equipment. The backlog of orders grew 40 percent year-over-year during the third quarter as earnings jumped 44 percent on record revenues.⁶

It’s not only selected corporations like CAT, reporting solid business improvement either ― recent US economic data is also surprising on the upside.

US Economy Picks Up Steam

US gross domestic product (GDP) growth rose 2.5 percent last quarter, the fastest pace in a year, up significantly from a 1.3 percent growth rate in the prior quarter. No evidence of a double-dip in this data.⁷

For economists, another important milestone was surpassed last quarter as inflation-adjusted GDP climbed to a new record high of $13.35 trillion, exceeding the old pre-recession peak of $13.3 trillion in 2007.⁸

So in spite of claims from the double-dip doomsayers, it’s clear that the US economy is now “officially” out of recovery mode and in a full-fledged economic expansion.

There is plenty of other positive evidence that tells us the expansion should continue.

Industrial production turned higher recently and durable goods orders surprised significantly on the upside. Retail sales are growing at an annual rate of 8 percent ― so much for the supposed demise of the US consumer. Finally, the Index of leading Economic Indicators has moved higher for five months in a row.⁹

Truth be told: The economy continues to expand. Granted, growth rates may remain sluggish over the next several quarters, but we’re headed in the right direction.

While still a source of concern that we’re monitoring closely, easing fears over the EU debt crisis is another positive sign. When coupled with continued strong profit growth and the recent upturn in economic data, in our opinion, these developments should help support investor confidence, providing a continued lift to financial markets.

No double-dip recession is still our forecast at Banyan Partners, as it has been. And no recession likely means that the stock market’s correction of nearly 20 percent between the April peak and October low was probably overdone. We expect share prices could easily move higher through year end.

As Chief Market Strategist Bob Pavlik recently told The Wall Street Journal, “I think the end of the year is going to finish pretty nicely for the stock market...”¹⁰

Good investing,

Mike Burnick
Director of Client Communications
Banyan Partners, LLC

P.S. Today is your last chance to register to attend our special online briefing tomorrow: Mastering Global Asset Class Rotation. If you’re not on the guest list yet, just click here to RSVP now.

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¹ Bloomberg data, 10/18/11
² Bloomberg: Papandreou Will Press on With Referendum, 11/1/11
³ Ibid.
⁴ The Wall Street Journal: Stocks Going By the Book, 10/31/11
⁵ Bloomberg: Economy in US Surpasses Pre-Recession Level, 10/28/11
⁶ PR Newswire: Caterpillar Third-Quarter Results, 10/24/11
⁷ Bloomberg: Economy in US Surpasses Pre-Recession Level, 10/28/11
⁸ Ibid.
⁹ Ibid.
¹⁰ The Wall Street Journal: Stocks Going By the Book, 10/31/11