LOST: Fighting for a Rescue and Recovery?

So the wife and I have become addicted to LOST - just in time for the final season, which airs in a week. We're done with seasons 1 and 2 and expect to put a strong dent in season 3 this weekend.

Not dissimilar from the show and its warped themes of survival, good/evil, and fighting for rescues and recovery is the stock market these days. It's a stretch but follow me here. The markets were shipwrecked and in disarray in late 2008. Then in March 2009, the government provided much need stability to the chaos and the markets began to breathe easy again - like the LOST survivors who settled into somewhat comfortable digs after adjusting to their new apparent fate. However, just like some of them became too comfortable with their primitive luxuries and seemed content to live without fighting for rescue -- the markets have been on a hiatus -- living off the stimulitive measures of the government and riding positive earnings report and economic data report after another to continued new market value levels.

However in the past month we've seen continued positive earnings (albeit some tough revenue reports) as well as positive economic data (5.7% GDP for 4th quarter 2009 today!) and yet the market has corrected about 7% from its recent highs of 1150. What's happening?

I would say that the economy has been quite stable and predictable sense March. The financial system was stabilized and dependable again. Unemployment peaked. And stimulitive measures gave autos and housing a boost, if not a stabilized bottom. However, these are temporary fixes - so the market (which priced these actions in as a full recovery must now reset and adjust to the reality). I would love to see a further decline to a level of 975 or 1015 on the S&P and then a very steady, almost flatline growth in the market in the next 6 months. I think that would accurately reflect reality. But there are traders and markets are more fickle, so while we may END at that point, the path there wont be quite so honest.

The reason I believe that such a result would be an honest assessment of the economy is because the economy isn't ready to have a full handoff from government stimulus (which provided 5.7% GDP) to the private sector. The private sector can support a 1% or 2% GDP level of growth, but not 5.7%! And that's what the market has to adjust to reflect.

Some interesting thoughts that could affect the market -- if the yuan is revalued by China and US exports shoot through the roof. This would be a huge boost to the economy (and thus markets). On the negative side, we're going to have the government crutches removed during the 2Q of 2010 and the 2nd half of 2010 will rely almost solely on private growth. This is tough - at the end of march we lose the $1.25 TRILLION mortgage purchases by the government (rates may increase by 1% as a result). Also, while the Pres. has a jobs initiative and more government spending to help - he can't permanent create longterm growth and jobs. That simply takes time and a private sector infrastructure to support real job growht. It will come but not quickly. Plus, more government spending only continues to threaten our debt security and result in more taxation down the road.

The government is largely out of bullets, the economy will take time to heal PROPERLY, and the markets must adjust to reflect that.

Oh, and don't forget, some countries actually have a risk of going bankrupt - like Greece and Portugal. The result would be destabilization of finances and markets -- THIS WOULD BE BAD. Think of the effect that the destabilized nature of late 2008 had and its consequences.