A month ago, we got an impressive but short-lived rally following the passage of the austerity package in Greece. More recently, the relief rally following the raising of the US debt ceiling barely made it out of the gate.

At best the sovereign debt problems in the US and Europe have been temporarily put to the aside — and even that is not assured given recent contagion fears in Italy and Spain. But a bigger worry has taken hold of the market: is the global economy headed back to recession?

With the inventory build no longer driving the economy, growth is now reflecting real end-user demand. Unfortunately there isn’t much of it.

Personal consumption is by far the largest component of the economy, accounting for roughly 70% of economic activity. As everyone is well aware, the consumer has been, to varying degrees, on strike for much of the past three years. This is not hard to explain. Consumers can spend from income, accumulated wealth or borrowing. For much of the previous decade, consumers were able to compensate for the lack of real income gains through a surging housing market and a related debt binge. Unfortunately, neither of those factors can be relied on today.

To be sure, it has now become well understood that the economy is fragile. The challenge for investors is always to tease out how much of the good or bad news is currently reflected in asset prices. Assuming a prolonged period of slow growth, how much of such news is already baked into stocks?

The S&P 500 currently trades at 13.5x trailing earnings, and 11x next year’s earnings, a level last seen during the depths of the financial crisis. The market appears to already reflect some fairly pessimistic views. A valuation this low implies a further drop in economic activity from today’s already depressed levels. Effectively, the market is telling us that investors are expecting economic activity to drop to recessionary levels.

Assuming growth continues to bounce along at an anemic, but still positive level, then current equity prices already seem to be reflecting a significant amount of pessimism. As such, despite all the dire news, I would still maintain an overweight to equities versus bonds.