Reflation was alive and well in the financial and commodity markets last month. Although November’s rally was well short of the best months this year, no one’s complaining. After nine consecutive months of upward momentum, interrupted only briefly among the major asset classes, 2009 is shaping up as one of the best calendar years on record.
As our chart below reminds, the year-to-date tallies are impressive. By any standard, it’s been a stellar year. Barring a wave of selling this month, risk premiums are on track for results that seemed impossible as 2009 opened.

The trend has definitely been our friend in the cause of rewarding risk. Momentum is king, at least for the moment. The big winner so far is emerging market stocks, which have surged by nearly 70% this year through November 30. Junk bonds are also posting unusually large returns. The laggard, of course, is cash, which is just about unchanged on the year.
The connection between return-less cash and outsized gains in risky assets is proceeding according to plan. The Federal Reserve has engineered the party and so far everyone’s enjoying themselves. The powers of easy money are feted the world over as we write. And that’s what worries us. No, we’re not expecting any sudden change of sentiment in the crowd. In fact, we’d be surprised if the upward momentum doesn’t roll on into the new year.
But 2010 is likely to look much different than 2009. The economic recovery, to be blunt, will face a host of challenges that were largely ignored or irrelevant this year. The Phoenix rising from the ashes is destined for the hard work and complications of navigating the new landscape of subpar growth, debt, higher interest rates and inflation and the general hassles that accompany rebuilding what’s been lost over the past two years.
For now, however, the party’s swinging. Enjoy. But don’t become too distracted. Expected returns fluctuate, which reminds that the midnight chime may yet turn our gilded carriage into a pumpkin.