Ronald Reagan once quipped that the most terrifying words in the English language were: "I’m from the governement and I’m here to help." Yet, the public perception of the role of government in the economy has changed markedly from what it was 25 years ago. All eyes were on Washington last week as the Obama administration unveiled the Financial Stability Plan intended to address problems with banks and lending and Congress completed its roughly $800 billion economic stimulus package, the American Recovery and Reinvestment Act of 2009. However, the market was not impressed with what the government had to offer.

Last week, the stock market slid back to near the low end of its range of the past four months on disappointing labor market data and frustration with Washington’s lack of clarity. Not all of the data was bad. For example, the retail sales in January were suprisingly strong, posting the first gain in seven months. However, the uncertainty and delay in policy action left a negative tone to the data – good news was viewed as unsustainable and bad news was greeted as a sign of a deepening recession. While we continue to believe te economy and market are likely to follow our base case for 2009 (described in the 2009 Outlook Publication), the risk of our bear case unfolding increased this week.

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