In case you were wondering, 2009 is on track to be among the best years in the annals of the stock market. There’s still nearly three months of trading left, of course, and so we shouldn’t write anything into stone just yet. But as we write, it doesn’t get much better than this. In fact, we don’t expect it to get any better and in relative terms, at least, it’s likely to get quite a bit worse. Or perhaps we should say less stellar.
Whatever label is appropriate, there’s just no way that equities can maintain the pace so far this year. As our chart below shows, it’s been nothing less than extraordinarily profitable in the land of equities, here and abroad. The bullish momentum may roll on, of course. In the short term, anything’s possible. But as a strategic matter, there’s reason to wonder.

This much is clear: The trailing returns of recent vintage won’t survive for the year or two ahead. No, that doesn’t mean that we’re headed for a new bear market, although no one can dismiss the idea entirely given the still-precarious nature of the economic revival. But equity performance is headed for a period of lesser results, if any, for the foreseeable future.

The gains this year have largely been a reaction to the recognition that the global economy dodged a bullet earlier this year. That doesn’t mean that all’s well, but no longer are we rushing to hell in a paper suit. When the financial crisis of late-2008 exploded, equities were quickly repriced in anticipation of the worst-case scenario. As it became clear over the course of 2009 that the worst case was no longer the likely case, risk was repriced again at something approximating “normal” levels.
The return to normal, if we can call it that, is more or less complete as far as equities are concerned on a strategic basis. There may be exceptions, but looking out across the world it’s tough to make the case that equities are cheap. They’re not necessarily expensive either, and therein lies the challenge: Deciding what valuation is appropriate for the months and years ahead, which promise to be anything but routine in terms of post-recession periods over the past several decades.

No, equity markets haven’t returned to the previous highs yet, but the old peaks were over baked and beyond the pale in the current economic climate. What prevails now is roughly equilibrium, albeit an anxious variety. Markets are no longer pricing equities for a world of economic disaster. At the same time, Mr. Market is struggling with putting a price on what comes next.
Governments around the world are working overtime at the game of reflation. Judging by equity prices, they can point to a measure of success…so far. But the all-or-nothing trade is behind us. In late-2008 and early 2009, investors had but one question to ask and answer: Will the economy survive? If you got that right and invested accordingly, you made money, quite a bit of it in fact. Assessing risk and profiting from the analysis from here on out will be slightly more complicated.