The Longest Year

The year that ends tonight has been the longest of my life. For me — and for a lot of other people — it began on Sept. 15, 2008.

That was the day Lehman Brothers collapsed, Merrill Lynch and American International Group teetered, and the world looked into an economic abyss. Everything we thought we knew about our financial lives was called into question, from how to determine the value of what we owned to how to keep our money from simply disappearing overnight. The only investment anyone wanted, it seemed, was cash. People with cash paid the government to hold it for them.

Just 15 months later, I need to review old articles and news videos to remind myself just how shaky things looked at that moment, when the biggest banks in the world stopped trusting each other to stay in business for another 24 hours. We retain facts, but our emotional memory fades quickly.

Policy makers had no playbook to help them deal with the crisis. They had to improvise responses as each reverberation of Lehman’s failure echoed through the financial system. They did not do everything right. But they did enough things right, eventually, to stabilize things. Most importantly, they realized immediately that the global economy might not survive if another institution Lehman’s size or larger were to collapse, and they made certain that none did.

The next time a politician or a talking head breathes fire about bailouts for bankers, take a look at those articles from last year for yourself. Those bankers were in the same boat as the rest of us. We bailed because we all needed to stay afloat.

Those who did not panic could see, within a few weeks, that the right steps toward stability and eventual recovery were being taken. Our firm placed an advertisement in a local newspaper in October 2008 to make this case, and we followed with an optimistic article in our newsletter last January. But it took until March, some six months after Lehman’s implosion, for financial markets to stop reeling.

The S&P 500 stock index opened 2009 just above 900, down from its all-time high of 1565 in October 2007. It fell below 700 in early March at the worst of the panic before launching a steep recovery.

It was still below 900 in April, when I began offering clients my personal prediction that the index would finish the year at 1100, plus or minus 100. I don’t have any particular ability to forecast short-term market movements, and I don’t trust anyone who claims that he does. I did not, and would not, do anything differently because of my guess about how the market would behave. I just thought that we were clearly on the path to recovery and that this would most likely show up in the market’s performance during the rest of the year.

The index has hovered near 1100 since late October, and has been above 1120 most of this week. This particular guess happened to work out.

So I’ll push my luck with another one. My prediction for 2010 is that the S&P 500 will finish the year at 1320, plus or minus 100. This means I expect another year of steady though not spectacular economic recovery, and I expect this will have a significant impact on corporate profits.

Apart from the financiers who placed their institutions in great peril, most business managers have acquitted themselves well throughout the Great Recession. The wave of layoffs last fall and winter drove unemployment to uncomfortable heights, but it kept most companies in business even as consumers slammed their wallets shut. Those companies, having survived, are still around to rehire workers when demand picks up.

It was a very long year, but we all got through it. It certainly has been a learning experience. I do not mean to minimize the pain and despair of people who have lost jobs, homes or other things that are important to them. But for most of us, this year is ending on a decidedly brighter note than it began.

Best wishes for 2010, from all of us at Palisades Hudson.