From abject fear to naked greed in a year
Over Christmas, financial markets tend to trade in low volumes and generally fail to make substantial gains or suffer big loses. Volumes this Christmas were indeed light, but equities have been moving up consistently over the past two weeks.
Last Monday the Dow Jones recorded a new high for 2009, reaching 10,549, which represents a 17% rise for the year. Whilst a 17% rise is not to be sneezed at, the real story of the year was the 60% rally in equities since March and the dynamics behind it.
When the year started, the financial sector was still staring into the abyss. The Lehman Brothers collapse, America's biggest-ever bankruptcy, was only a few months old and interbank lending remained frozen.
For the first two-and-a-half months, equity prices tumbled as investors predicted and priced in a deep and protracted recession, if not depression. There was panic selling, and by early March, the Dow Jones was already trading down 27% from the start of the year. However, with all the might they could muster, leaders across the globe were frantically announcing stimulus packages.
On 13 February, the US congress passed the American Recovery and Reinvestment Act of 2009, which approved the injection of $787bn worth of recovery funds. One month later the US announced the 'Public-Private Investment Programme', which planned to buy up to $1 trillion worth of toxic assets to help repair bank's balance sheets. President Barack Obama had been only two months in office and it soon became clear that he was not shy when it came to spending.
These were the seeds of what was to come from March to the end of December – a 60% rally on the Dow Jones, a 64% rally on the German Dax, and a 54% rally on the FTSE. Even the Iseq managed to stage a rally, gaining 23% on the year, and at one stage it was trading 81% higher than its lows.
There was without doubt ample opportunity to make money this year. For a flexible trader willing to take risk and go short or long on the market, 2009 was as the military – or more colloquially a US fratboy – might say, a "target rich environment", from individual stock picks such as Apple and Goldman Sachs, which both doubled in value this year, to General Motors, which collapsed. Bigger-picture macro traders may have looked to the massively oversold oil market.
On 6 March, after months of calling the market down, we said we "may have seen the bottom here" and that it could be worth gaining exposure to a long equity index position. While the timing was impeccable, with hindsight a stronger statement would have been preferable, but what was important was the flexibility of attitude.
The ability to be flexible next year will be of utmost importance, but more on that in next week's piece when we will talk about 2010 and what you should watch out for.
As 2009 progressed there was an unusually wide variety of market-moving news stories. In the M&A world there was the merger of two of Britain's financial powerhouses, Lloyds and HBOS. On the central banks front, the Bank of England and ECB cut rates to historic lows, and many banks had to resort to printing cash. Even criminal enterprise had a market-moving impact when Bernie Madoff's massive Ponzi scheme came crashing down.
In the econometric area US unemployment hit double figures, while on the sovereign debt front many countries suffered downgrades from the ratings agencies. However, despite all the negative news, there was a growing belief that the global economy was out of the woods and that 2010 would be a good year.
It was not just equities that felt the positive effects of the tide of optimism. Commodity prices were another big story of 2009. Oil staged a 70% rally over the 52 weeks, silver rose 55% and gold finished the year up 25%.
The declining value of the dollar after March helped boost demand for commodities, which are all traded in dollars. The dollar index, which measures the value of the dollar against a basket of major world currencies, fell 13% from its March highs. Increasing risk appetite among investors dampened the demand for the safe-haven status of holding dollars.
In 2009, sentiment amongst investors shifted from abject fear to naked greed, and the sharp moves down and subsequent rally in the markets paint a perfect portrait of this mood swing.
Paddy Haran is a trader at Delta Index