As with most stock markets the world over, the Australian equity market has gotten off to a good start in the New Year despite gloomy expectations surrounding the global outlook and indications of weakening in the domestic economy.

With only two trading days left in the first moon of 2012, the domestic bourse looks set to finish January on the up and up - a positive indication of things to come if you believe the January effect.

The All Ords has already risen by 5.8% to date, though it still has to about 16.5% to climb to claw back its 11 April 2011 high of 5,064.9 points.

Could be a tall order Roger.

The present economic backdrop and corresponding dour outlook indicates that the All Ords might find it difficult to reclaim this ground over the next 12 months, not with the cloud of uncertainty still hanging over Europe - its recession (imminent or already here) and the volatility in the financial markets intermittent speculations about its future create.

The recently released UK GDP figures - down 0.2% in the last quarter of 2011 -- provide evidence that a recession is already underway in Europe while growth in the US economy came in at an annualised rate of 2.8%, disappointing expectations for a 3.1% expansion.

Moreover, emerging signs of weakness in domestic economic activity also present a strong hurdle for Australian equities to overcome. Not least of which is the softening Australian labour market and the attendant weakness in retail spending.

How soft? The Age's website printed how soft.

"AUSTRALIA'S unemployment rate is heading towards a nine-year high of 6 per cent, economists say, with some industries preparing to slash staff and other industries suffering gradual job erosion."

Did I read right? Australia's unemployment will reach 6%! Boy, oh, boy, then the America must really be in the mud - the Fed expects the jobless rate to drop to only 6.7% by 2014 (and that's the optimistic end of its forecast).

"The manufacturing, retail, construction and finance industries are all set to shed labour. At best, this means tepid jobs growth in the economy overall - less than the net 15,000 new jobs needed every month to keep the unemployment rate stable. And at worst, potentially the loss of up to a net 25,000 jobs during the year."

Maybe not coconut.

If the current investor optimism -- or at least with investors discounting the bad news - persists, the All Ords still has a fighting chance. Especially considering the Reserve Bank of Australia's (RBA) pro-active stance towards monetary policy.

The RBA has already cut interest rates by 50 basis points each in November and December last year taking the official cash rate down to 4.25%. Financial markets expect the Australian central bank to announce another 25bps rate reduction when it holds its first meeting of 2012.

Tame domestic inflation figures - and declining trend in consumer prices - provide no deterrence to the RBA. Last week's Fed announcement extending the "low levels of the federal funds rate" from mid-2013 to "at least through late 2014" should also assist.

This would provide further impetus for Australian equities that are currently trading at attractive valuations.

Local equities are trading at a trailing price-earnings ratio of 12.8 times - far below their long-term historical average of 14.7 times.

Similarly, the Australian equity market's dividend yield of 4.72% offers a premium over the 3.8% currently available on 10-year Australian bonds.

Nice one, don't you think?

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The Sydney breakfast session of this year's Financial Standard Chief Economists Forum is now sold out. You can still catch Ben Ong at the Melbourne event on February 2 by registering at http://www.financialstandard.com.au/chief_economists_forum_2012_registration