The US economic recovery has been the weakest in over 50 years with little growth in wages or disposable income. However, exports have increased more than previous recoveries due to continued global growth around 4%. While uncertainty remains from Europe, US corporations have benefited from exports and global sales. Investors should focus on downside protection, globally competitive large companies, and income strategies.

1. MARKET OUTLOOK MAY 2012
OVERVIEW
US economic growth, though moderate, continued for the 9th quarter in a row, but it is by far
the weakest recovery in over 50 years. For US workers, this is the weakest recovery as
measured by wage income. There has been virtually no growth in per capita disposable income
since the recession’s end almost 3 years ago. For the US economy, this recovery has been
supported by export growth more so than any other. In spite of Europe, global growth
continued to remain near 4%, which is a good pace and comparable to previous recoveries. For
corporations, large cap domestic firms have been the biggest beneficiary of both the export and
global growth trend. For investors, the focus needs to be on continuing to think outside of the
framework that has been in place throughout the 80s, 90s and early 00s. This is a different
market environment.
US ECONOMY
US economic growth, though moderate, continued for the 9th quarter in a row (Chart below).
Economic growth for the first quarter of 2012 was 2.2% slightly below Q4 of 2011 but ahead of
Q1, Q2, and Q3 in 2011. By historic standards, this economic recovery has been one of the
weakest on record.
SLOW COMEBACK
Gross domestic product, quarterly change at an annualized rate
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2. Almost all previous recoveries saw growth rates that exceeded 5% for a period of time
following a recession. This one has not.
ECONOMIC RECOVERIES CURRENT RECOVERY
Source: Bloomberg
For workers, this is by far the weakest recovery when measured by wage income as there has
been virtually no income growth since the recession’s end almost 3 years ago. Since the end of
the recession in June 2009, per capita disposable income has grown by only 0.7% (Chart below).
The average of the four previous recoveries has been 6 %. In 1975 disposable income grew by
10.5%, while at the low end, in 1991, disposable income grew by 4.0%
PER CAPITA DISPOSABLE INCOME
(Inflation Adjusted)
Source: Wall Street Journal
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3. US BENEFITS FROM GLOBAL GROWTH
However, the US has been a growing beneficiary of stronger global growth (Chart above right).
This recovery has seen exports of goods and services rise by 25% since the 2008/09 recession.
This is better than each of the previous recoveries in 2001 and 1991 and much better than the
1980 and 1975 recoveries.
EXPORTS OF GOODS AND SERVICES
(Inflation Adjusted)
Source: Wall Street Journal
By one measure of manufacturing activity (Chart below), growth remains positive across the
global economy, excluding Europe. Despite very negative headlines in Europe and some
negative headlines in the US, global manufacturing growth is positive in Eastern Europe, the Far
East, South Africa, South America and North America. China is sending mixed signals.
US Corporations have been major beneficiaries of both the US export and global growth
themes.
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4. The 50 largest US corporations, as measured by market capitalization, generate an average of
43% of their sales from non-US markets (Chart below). For those companies that are generating
above market growth rates, such as Qualcomm, Caterpillar, Pfizer, Kraft, and IBM, international
sales are well over 60%. Not surprisingly, many of these same names are outperforming the
broader market.
Source: Bloomberg
For markets, near term the correction which began ‘in early April has continued through mid
May’. With the situation in Greece continuing to worsen and Europe potentially entering a
recession again, macro uncertainties are again overshadowing bottom up fundamentals. We
expect bipolar environment to continue, with downside and upside risk being about equal. The
US election cycle, debt ceiling debate, and potential tax hikes set for 2013, will only heighten
the uncertainty.
PORTFOLIO CONSIDERATIONS
Investors need to continue thinking outside of the framework that has been in place
throughout the 80s, 90s and early 00s. This is a different market environment.
Key themes to focus on include a dedication to downside protection, aka insurance. Whereas all
individuals have insurance for their lives, houses, medical needs and cars, it is surprising how
few have similar protections inside their investment portfolios.
Opportunities for return include large capitalization firms with global brands and strong balance
sheets, many of whom generate stable cash flows and pay healthy dividends. Areas for capital
preservation include income generating strategies that can control downside risk and reduce or
eliminate most equity market exposure. Additionally, for now, staying out of certain Euro-zone
asset classes seems prudent.
OLYMPIAN CAPITAL MANAGEMENT
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