The market focus has been on the potential negatives. The legitimate concerns about the problems in Europe and the possibility of a double-dip recession have dominated market commentary. As a respite from the relentless negativism, this article ventures to recognize some of the recent good news.

The Economy

Every day there is renewed talk that the U.S. economy has either already entered a double-dip recession, or that it will soon. The recession assumption is rampant.

There just isn't any data to support that conclusion yet.

The Briefing.com GDP model puts third quarter real GDP growth at an annualized rate of 2.5%.

This is based on the released data which show:

1) Consumer spending rising at close to a 3% real annual rate in the third quarter.
2) Business investment continuing to rise as evidenced by a strong 2.4% gain in factory orders in July (the most recent data).
3) Industrial production rising four straight months through August.
4) A drop in the trade deficit in July which will boost third quarter GDP.

The housing market remains a disaster, and government spending is weak. These well known factors provide a drag on GDP, but are not so bad that they will produce a decline in overall real GDP.

Furthermore, the traditional early economic signals of recession aren't flashing.

The leading indicators index has risen four straight months (through the just released August data).

New claims for unemployment, while disappointingly high at about 420,000 per week, haven't shown the spike that typically occurs before a downturn in the economy. A spike upward towards 500,000 would normally be occurring at this time if the economy was headed towards recession in the fourth quarter.

Given the trends in the current data, our model puts fourth quarter real GDP growth at an annual rate of 1.5%.

On balance, the economic data continue to trend as they have for almost two years -- producing sluggish but positive overall real GDP growth.

A recession is certainly possible, particularly if Europe quickly turns very ugly. The good news, however, is that the current data suggest sluggish but positive growth will continue through this year.

Earnings

There was actually an article recently that said "the only good news for stocks is strong earnings." Wow. From a fundamental standpoint, earnings are ultimately the entire basis of value (along with interest rates, which impact relative return analysis and the discounting to present value of future earnings).

Everything else - inflation, the economy, geopolitical conditions, credit market conditions - everything - is ultimately only important insofar as the impact on earnings.

Yet, right now, strong earnings growth is being ignored.

Just this past week, these were the largest companies that reported earnings:

Not all the reports are spectacular, and there are understandable concerns about future earnings given global economic uncertainty, but the fact remains that earnings releases, on balance, continue to bring very good news.

More good news is likely.

Third quarter aggregate earnings for the S&P 500 are expected to rise about 14% over the same period a year ago. That is a very strong gain and well ahead of the long-term growth rates. Starting in early October, these third quarter earnings reports will bring good news.

It hardly matters.

The market is afraid that earnings will plunge in the quarters ahead if European credit markets and economic growth implode. That, of course, so the thinking goes, will lead to a recession in the U.S. that will drive U.S. profits sharply lower.

The fears of the future are trumping current good news. The market is priced for a sharp decline in earnings over the year ahead.

Nevertheless, the upcoming third quarter earnings reports will bring good news.

More Good News for Shareholders

The dividend yield on the S&P 500, at 2.2%, is (quite a bit) higher than the 1.8% yield on the 10-year Treasury note.

Investors in Treasury notes won't ever see an increase in the coupon they are clipping, but dividends are on the rise.

Just this past week, the following dividends increases were announced:

These are large companies and their dividends matter. Each company has sharply rising profits and the dividend is well covered. This news is not insignificant.

Furthermore, there is plenty of room for more dividend increases from other companies. The payout ratio of dividends to profits for S&P 500 companies is at historic lows.

There will be substantial dividend increases over the next six months. Investors in high quality, blue chip stocks who can weather the turbulence in Europe will see their dividend returns increase.

The good dividend news has barely made a ripple in overall market sentiment, but it matters a lot to holders of the stock.

What It All Means

The market situation isn't that complicated. There is extraordinary relative value in stocks. This value is underappreciated because there are tremendous fears over the situation in Europe, and the possible implications for the U.S. economy and corporate profits.

The likelihood of a "Lehman-like contagion" that would lead to another market rout is almost impossible to quantify but, even if small, is defining stock market trends.

This topic is also impossible to avoid, and every time the market takes a dip (or dive), it seems to be a self-fulfilling prophesy.

As we have said before, credit cycles take a long time to play out, and so will this one. But hanging on to high quality stocks that pay a dividend in excess of Treasuries, with rising dividends, can provide solid returns over the long term.

The good news won't get a lot of ink, but it is comforting to at least occasionally review the data still which show:  steady economic trends, solid earnings growth, and rising dividend yields from already high relative levels.

--Dick Green, Briefing.com