2009 Christmas Card from the U.S. Financial Markets

Includes: DIA, SPY
by: Mark J. Perry

The Bloomberg U.S. Financial Conditions Index provides a daily measure of the relative strength/weakness of the U.S. money, bond and equity markets, and is considered a useful gauge of bank lending conditions and the overall availability of credit. A little more than a year ago in the wake of Lehman's collapse, the financial markets were gripped by fear and panic, and credit risk soared to historic levels (see CD post here on the TED spread). The Bloomberg U.S. Financial Conditions Index plunged from -2.51 in mid-September to -11.3 by October, for an unprecedented five-fold increase in financial market risk within one month (see inverted chart above). U.S. stock prices plunged by more than 25% during that same period, and financial panic started spreading worldwide.

By this time last year, the Bloomberg Index had improved slightly from the October lows, but was still signaling significant trouble in the U.S. money and capital markets, and there was certainly nothing to provide much hope last holiday season. As Scott Grannis reminds us, the world was preparing to celebrate last Christmas and New Year’s in a period of “Great Fear and Trembling."

What a difference a year makes. As we celebrate Christmas and New Year's this year, the U.S. economy and financial markets have staged a remarkable turnaround and the economy has entered a period of gradual, but unmistakable recovery. The inverted Bloomberg Index in the graph above tells the story graphically, and is the "2009 Christmas Card from the U.S. Financial Markets."

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