The Unexpected Recovery

Last week on March 9, 2011, the world celebrated the two-year anniversaryof the low point in the global markets, the point of maximum pain and panic following the 2008 financial crisis and Great Recession.

On March 9, 2009, the S&P 500 Index had fallen to its low of 676.53, which is about where it had been almost 13 years before--on June 10th and October 3rd of 1996 it closed at 672.16 and 692.78, respectively. On March 9, 2011, the S&P 500 Index closed at 1321.15--a 95% increase from its low two years earlier but still down 18% from its all time high of 1565.15 on October 9, 2007. During the same two year period of time the Russell 2000 Index--an index that tracks small cap stocks--rose almost 140% from 343.26 to 821.19.

If you look back at the economic forecasts and market reports in March of 2009, you will not find a prediction that the markets would recover as they have. There was even some doubt whether the U.S. economy would survive intact, and the most common prediction was deflation, continued recession and more downside in the stock markets.

In retrospect, this most frightening time was the ideal time to shove all the chips on the table and bet everything on a stock market recover--but who had the intestinal fortitude for that? After the losses that virtually all investors had sustained, no matter where they had deployed their assets, few had the stomach, or the heart, to bet on a robust recovery. This is a terrific lesson in the value of disciplined investing; the consensus and our own gut feelings are often wrong and inevitably point us in the opposite direction from where the returns are going to come from next. In the past, every long-term upturn has been greater than the losses sustained in the prior bear market. We don't know how this one will end, but it seems to be following the same seemingly unlikely, but not unusual, course.