Last week's announcement that the U.S. economy had expanded in the fourth quarter (the second consecutive expansion) by a greater amount than what the market consensus expected took everyone by surprise, raising the risk that the resulting complacency may lead to a premature withdrawal of some of the more critical stimulus plans in place.
The trouble stems from the nature of the downturn which in this case is structural rather than cyclical. Historically speaking, it takes an economy significantly longer to recover from a structural downturn than a cyclical one. The combination of greater government regulation in an environment of high unemployment and weak consumption can only contribute to extending the period of slump. The stock market rally in 2009 may reflect a disconnect between expectations and the real fundamentals and, as a consequence, stocks may disappoint this year.
