2011 In Review: The Year That Wasn't

by: Jeff Miller

The "year in review" market is another crowded trade. Either you have a special angle or why bother? I hope readers enjoy playing along with my idea for the year that wasn't.

My approach involves an essential analytical skill. You need to have a basis for comparison -- often called the "counterfactual." Regular readers know that this is a frequent theme at "A Dash." If you want to evaluate the stimulus legislation, or the Bush-era tax cuts, or the effect of the Iraq war -- you cannot just ask where we are, but also where we would have been in the absence of that policy.

What was at the end of the road not taken?

With that in mind, I offer six events/decisions for your consideration. In each case our question is: What would have happened in the absence of the event in question?

I have done my own speculating, but I invite comments and other nominations. I am focusing on US equities, but the impact on other markets and sectors might have been highly correlated. Please note that I am not offering an opinion on whether the event or decision was good or bad. The question is whether it was market-friendly. (See here if you want more insight into why this is important).

Three Bullish Events

Here are three things that happened that improved market performance in 2011.

  1. Fed policy. We saw QE II which everyone believed was important -- so it was, whether the effects were substantive or psychological. We also got Operation Twist. The Fed is on a mission, and it has increased the monetary base, although with a smaller effect on M2.
  2. The Greek Leadership Debate. The market went into a tailspin when Greece questioned the bailout terms and suggested that they might invoke -- (drum roll) --- DEMOCRACY. This had the potential to unravel the entire European story, but the Greek leadership change kept the incremental rescue process on course. (runner up to Italy and Spain).
  3. The NATO involvement in Libya. In the absence of this decision, the rebels would probably have been crushed. Oil prices might well be significantly higher. The course of Arab Spring would have changed. (runner up to the Osama bin Laden 'excecution').

I suggest that in the absence of any of these events, the US stock market might have declined significantly this year. What do you think?

Three Bearish Events

Here are three things that happened that hurt market performance in 2011.

  1. The Japanese earthquake/tsunami. When this occurred the world economy seemed to be on the mend. What started with a tragedy for the Japanese had a global effect. There was a hit both to consumption and to production. US companies could not build things because of supply chain problems. Most ironic outcome? Ford could not supply cars painted black! What would Henry have thought?
  2. The debt ceiling debate. While the parties reached an agreement in the nick of time, no one appreciated the inside view of the sausage factory! China expressed alarm. The S&P downgraded the US. Europe did not understand, so US leaders lost whatever moral authority they might have had. Consumer confidence plummeted in a fashion that equaled the major crises of the century. This turned out to be a really big deal, even though all of the professionals never doubted that the limit would be extended. There is a lesson here, but no sign that it is being learned in the right places.
  3. The Dominique Strauss-Kahn story. This is my "surprise" nomination, but the logic is clear. The WSJ now says that "dithering" turned the European problems into a global threat. If DSK had been on the job in May, the organization and response would have been stronger. It took many weeks to recover. This is true regardless of the cause of the incident, but the conspiracy theories are now afoot. So far the speculation has focused on DSK's political enemies in France. Will the Oliver Stone movie version feature them, or a band of happy Wall Street short sellers?

I suggest that in the absence of any of these events, the US stock market might have rallied significantly this year. What do you think?


Sometimes events have a temporary market effect. If the economy or the market is already at a tipping point, the impact of stories that originally seem minor can be magnified significantly. Especially if it is a slow news day.