2009 Review: Bulls Bet Big on Bernanke, Batter Bears

Stocks sure didn't start the year on the right foot, tumbling into early March amid the ongoing fallout from the September 2008 Lehman Brothers bankruptcy and fears of bank nationalizations. But from the depths of the March lows, major averages mounted a historic and pretty much unrelenting rally.

In the past 12 months, the Dow and S&P are each up more than 20% while the Nasdaq is up more than 40%.

Hindsight being 20-20, the bears were wrong for two major reasons, as Henry and I discuss in the accompanying clip:

• The world didn't end: It may be hard to imagine now, but there were legitimate concerns about a total collapse of the global system of finance and trade in late 2008/early 2009. Such fears both resulted in and were reinforced by a shockingly steep decline in global economic activity during the period. The hardcore bears thought the damage done in 2008 was too great to overcome and the global economy would slide into a deep recession, if not outright depression.
• Don't Fight the Fed: The bears were wrong about the economy because huge, coordinated monetary and fiscal stimulus from governments around the world helped stabilize the banking system and revive the global economy. Ben Bernanke talked a lot about the Fed's "toolbox" and he dug deep into it; programs aimed at shoring up Treasuries, mortgage-backed securities and other asset-backed securities -- combined with a zero-interest rate policy -- helped "reliquefy" the banks' balance sheets, spurring record profits for the industry., A related "reflation" trade helped boost "risk" assets ranging from stocks to emerging market debt to commodities, most notably gold -- all at the dollar's expense.

Huge fortunes were made in 2009 by investors like Warren Buffett and Appaloosa's David Tepper, who took the Fed and Treasury at their word when they said they wouldn't let certain (big) banks fail. Many others won big simply by being long as the unwinding of the "Armageddon trade" of late 2008/early 2009 gave a boost to the vast majority of stocks and sectors.

The year revived a lot of portfolios battered in 2008 and left egg on the face of many skeptics; yes, myself included. My concern earlier this year was banks weren't forced to write-down their toxic assets, and I'm still concerned there will be a related comeuppance. But I underestimated how much the Fed and Treasury could do to help the banks without addressing the core of the problem, as well as the animal spirits of speculators flush with easy money. I wasn't alone in this regard and a day of reckoning for the government's largess may yet lie ahead; but the market's momentum shows few signs of abating as 2010 beckons.