During the last week in January, the Department of Commerce surprised the markets with a better-than-expected advance estimate for economic growth for the final quarter of 2009. That number, which came in at a 5.7 percent annualized pace, also represented the best quarterly result since 2003. (We should note that this assumes that it’s not revised lower in the next few months, as is often the case.)

The surprisingly strong result was not driven by the bubbling demand of consumers ramping up spending, as personal consumption expenditures actually dipped from the prior quarter. Nor was it a substantial pickup in government consumption, which was basically flat on a quarter-over-quarter basis. Far and away, the greatest component of growth was the increase in private inventories, which accounted for about 60 percent of that 5.7 percent annualized growth for the quarter. Inventory restocking is a normal, cyclical development in a recovering economy intended to reverse the typically aggressive and calculated reduction in inventories during recessions.

One week later, the Employment Situation report for January provided a surprise to analysts, as the nation’s unemployment rate dropped unexpectedly to 9.7 percent, its lowest point since last August. Economists had broadly expected that the jobless rate would remain unchanged at 10 percent. Nonetheless, it wasn’t a significant uptick in the pace of job creation that explained the result; in fact, in that same report, the Bureau of Labor Statistics estimated that the economy lost another 20,000 jobs in January. Instead, the report draws attention to the methodology used to estimate the health of the labor markets. The report relies on the sampling of two separate and distinct groups: individual households and the establishment, the latter of which focuses on employer reports of their activities. In the absence of a meaningful increase in the pace of job creation, the decline in the unemployment rate is unlikely to be sustained.

Why are these economic releases significant? Not because they presented compelling evidence that the economy was in the nascent stages of a robust rebound, nor because they clearly showed that the critical economic elements of consumer demand and job creation were nowhere to be found. Instead, both reports illustrate the nuanced nature of economic data and the great potential for misinterpretation of statistics. Often, headline numbers may be misleading when a broader context is not considered.

Despite the fact that the so-called “headline” numbers in these two reports suggested that conditions were improving to a greater degree than many economists had projected, neither was sufficient to indicate that the recovery would not be sub-par. In fact, due to the severity of the decline in GDP that happened during the recession, an initial snapback in growth at the beginning of a recovery was to be expected. Nonetheless, we believe that substantial secular economic headwinds to growth remain legitimate concerns within the context of the so-called “new normal” economy. In the years ahead, potentially higher taxes, rising interest rates, increased regulation, and private sector deleveraging all are likely to weigh on growth and, ultimately, capital market returns. The ebb and flow of economic data can drive short-term investor sentiment, but over the longer term, capital market performance is driven by fundamentals such as economic growth, valuations, and corporate profit margins.

Within the context of portfolio positioning, developing one’s strategy based on a focus on the long term rather than attempting to navigate the day-to-day meandering of the market is a prudent choice for the patient investor. Diversification across a wide range of asset classes and strategies can position a portfolio to participate in market upside while still providing protection against downside moves. Within the context of the “new normal,” uncertainty may be even greater, and the need for broader diversification may be even more substantial.