What a difference a year makes.
At the beginning of last year, I had written about investors having endured severe losses during the previous year in the wake of the collapse of the housing and credit bubble in the United States, losses that I said they will not forget for a long time (see "Markets suffer painful 2008").
Well, investors may not have forgotten but they seemed to have forgiven as they poured back into markets in 2009, giving rise to spectacular gains for the year.
The following table shows the gains made by major stock markets according to the Morgan Stanley Capital International indices.
Some smaller developed stock markets made even bigger gains.
However, the most spectacular gains came among emerging markets.
Commodity markets, which had also suffered in 2008, made a similar turnaround last year. The Reuters/Jefferies CRB index jumped 23.5 percent in 2009. Copper in particular had a spectacular year, surging about 140 percent. Crude oil rose 77.9 percent.
Gold rose about 24 percent in 2009. It had actually risen 5.5 percent in 2008 as a safe haven play. Last year it rose again, this time as an inflation hedge.
The rush back into risky assets by investors meant that carry trade currencies weakened. The low-yielding US dollar fell 4.2 percent in 2009 based on the Dollar Index but gained 2.6 percent against the even-lower-yielding Japanese yen.
While low interest rates hurt currencies like the US dollar and the yen, it was precisely the fuel that drove asset and commodity markets up in 2009. The financial crisis that enveloped the world in 2007 and 2008 and sent economies into recession had induced central banks to lower interest rates. Low rates in turn drove investors back into markets that had the potential to provide better returns or hedge against inflation.
Easy monetary policy was not the only factor in driving up markets; governments also helped by providing various forms of guarantees to support their financial systems and restore confidence while spending heavily to reflate their economies.
Stimulative monetary and fiscal policies eventually helped economies and markets to recover in 2009.
As we enter 2010, the question many are asking is whether the rally in markets will continue, stall or even reverse.
The obvious risk for markets is a tightening of macroeconomic policy. With most economies now out of recession, an unwinding of policy stimuli in 2010 is a possibility and could threaten markets. In fact, some central banks, notably Australia's, have already begun a series of interest rate increases.
Some investors may draw comfort from the fact that the most important central bank in the world, the Federal Reserve, has verbally committed to keeping interest rates low for an extended period of time.
It would be small comfort though. The Fed also did not raise interest rates in the latter half of 2006 and in 2007. Fed hesitancy in raising rates encouraged investors to rush into stocks and commodities in 2007 and early 2008, only for the financial crisis to erupt and cause markets to tank in 2008.
The Fed is reluctant to raise interest rates this time around because it recognises that credit conditions remain tight. The latter means that the economic recovery is still fragile.
Meanwhile, commercial real estate in the US and many other parts of the world is still in recession. Dubai World's announcement of a debt standstill in November last year reminded us of this.
And the US housing market is far from fully recovered. Many fear that a second wave of foreclosures is imminent as rates for an increasing number of mortgages are scheduled to be reset in 2010.
So there is no room for investors to be complacent. Despite the recent economic recovery and on-going macroeconomic stimuli, conditions now may not be all that different from those in early 2008.
Still, the market gains of 2009 provided welcome relief to investors licking their wounds from the year before.