As 2009 wound to a close, it was hard not to look back at the global financial markets just 12 months ago and realize how far and how quickly the recovery had come. To quote our Outlook from one year ago in this same Market Review:
However, just as a strong April and May disguised the very weak returns of June, the stomach churning drop in October masks a broader rally in December that continues through the first week of the New Year. We will only be able to look back several years from now to see if the fourth quarter of 2008 represented the bottom of this bear market, or simply a pause in the decline. But for those investors with suitable long-term horizons, the current market uncertainty also presents many opportunities.
As it turned out we were off by just a few weeks and another stomach churning drop. The fourth quarter 2008 rally did fizzle out, and in fact nearly turned into a rout until the first week of March of 2009. Before the market rally was ignited in March, the Russell 1000 Index was down more than 23% and the Russell 2000 was down more than 34%for the year.
But slowly global governments came together to begin providing massive amounts of liquidity to the worldwide financial system and began providing backing to the banking system to restore trust, though too late to save many institutions. Accommodative monetary and fiscal policies thawed the frozen financial markets and allowed many market participants to liquidate positions to meet margin calls and investor redemption demands.
Through the remainder of the year, the global equity and fixed income markets rallied providing handsome returns in nearly every asset class. But the “bill” for all of this relief has yet to come due, and 2010 may see some of those costs come home. Certainly as the curtain rises on 2010, the money market fund industry is struggling to provide positive yields of any sort to their clients as 90-Day T-Bills are currently yielding just 6 basis points.
And while forecasts for the first signs of inflation, and thus the need for the Fed to hike interest rates, range from the second half of 2010 to early 2011, the increasing issuance of Treasuries to fund many of these support programs will eventually force rates higher, with or without the Fed. The biggest issue will be how the various government programs are eliminated and the excess liquidity supplied to the markets over the past year is eventually withdrawn. Premature withdrawal of government support in 1937 was one of the causes of the extension of the Great Depression.
Nathan Behan is a senior investment analyst at Prima Capital Holding Inc., a provider of investment research, technology and portfolio design to the wealth management and retirement industries.
