Yesterday’s news that the Chicago Fed National Activity Index (CFNAI) increased last month provides another data point to consider in the debate about recession risk. Looking backward doesn’t necessarily tell us what’s coming, but it’s clear that December’s economic momentum strengthened. January and beyond, of course, are still open to interpretation.

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Initial jobless claims increased last week, but so did new orders for durable goods in December. It’s a mixed bag of news, but a closer look suggests that the economy’s capacity for growth continues to bubble.

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Sometimes a picture really is worth a thousand words… and a couple of centuries. Graphing 222 years of U.S. long-term interest rate history isn’t exactly actionable information, but it’s damn interesting just the same. You want perspective? Here it is in spades. Heck, it’s also a great party favor for your next financial mixer. Thanks to Barry Ritholtz at The Big Picture and the primary source, Bianco Research, for this deep dive data dig. The obvious point is that we’re near all-time lows in the long bond. If that doesn’t spark a few thoughts, nothing will.

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Last week, I updated the Global Market Index’s (GMI) relative performance scorecard vs. actively managed asset allocation products. Now it’s time to look ahead.

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Does the International Monetary Fund’s diminished outlook for the global economy lay the groundwork for thinking that recession risk is elevated for the U.S.? Perhaps, although the IMF’s latest numbers suggest otherwise. Indeed, IMF projections for US GDP remain intact.

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The full profile of the U.S. economy for December is nearly complete, and so far the numbers continue to look mildly encouraging. It’s hardly a perfect report card, and we’re still waiting for some key numbers. But based on the data released so far, it appears that growth had the upper hand in the last month of 2011.

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It’s been a good year so far for risky assets. Year-to-date returns don’t mean much at this point, but the out-of-the-gate start keeps hope alive. Yet the crowd always finds a reason to worry and the “surprisingly tranquil” profile of runnup will do nicely. Nonetheless, U.S. stocks look quite strong on a technical basis these days as domestic equities extend the rally that began in mid-December. Foreign stocks are following suit. Or is it the other way around? But amid a rising appetite for risk, investment-grade bonds are sagging, thanks mostly to lightening up on Treasuries. It’s a different story for foreign bonds, which are rising in U.S. dollar terms, in part thanks to fresh weakness in the greenback. Meantime, commodities overall look stuck in neutral, although gold is beginning to percolate again. And after a brief respite, real estate investment trusts are taking wing once more. The question is whether the revival is a sign of things to come for the year ahead? Much depends on how the economic numbers fare in the weeks ahead. We know that recession looks like a done deal in Europe, but the consensus view is more favorable for the U.S. Meantime, here’s how the charts stack up for the major asset classes via our usual list of ETF proxies…

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Searching for a connection between asset prices and the business cycle is no spring chicken. The economist Irving Fisher, for example, theorized a link between short-term interest rates and economic expectations in his 1907 book The Rate of Interest. This was also the formative period for the Dow Theory. The strategy’s chief proponent, William Peter Hamilton, editor of The Wall Street Journal during the early 20th century, outlined the case for using the stock market as a proxy for measuring the ebb and flow of the economy. Reviewing the nexus between the broad trend and the market, Hamilton advised in his 1922 book The Stock Market Barometer: “What we need are soulless barometers, price indexes and averages to tell us where we are going and what we may expect. The best, because the most impartial, the most remorseless of these barometers, is the recorded average of prices in the stock exchange.”

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● First Principles: Five Keys to Restoring America’s Prosperity
By John Taylor
Summary via publisher, W.W. Norton
Leading economist John B. Taylor’s straightforward plan to rebuild America’s economic future by returning to its founding principles. America’s economic future is uncertain. Mired in a long crippling economic slump and hamstrung by bitter partisan debate over the growing debt and the role of government, the nation faces substantial challenges, exacerbated by a dearth of vision and common sense among its leaders. Prominent Stanford economist John B. Taylor brings his steady voice of reason to the discussion with a natural solution: start with the country’s founding principles of economic and political freedom-limited government, rule of law, strong incentives, reliance on markets, a predictable policy framework-and reconstruct its economic foundation from these proven principles.

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The dominant theme in the financial economics literature is that most relationships are dynamic. Everything from asset valuations to correlation and volatility fluctuate through time. This empirical fact applies within and across asset classes. Change, in other words, is a constant and it is the primary source of risk and opportunity. But there’s always an exception to the rule. Perhaps the leading example in finance is the persistence of average results by a representative index for an asset class or an asset allocation strategy.

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