Pessimism Gives Way to Hope
Financial markets function best when rules and outcomes are clearly defined, when risk and reward is known, and when winners and losers can be clearly identified. Well-functioning markets can quickly process new information, good and bad, and adjust prices to account for likely outcomes. Unfortunately, this was not the world we lived in 2011. Markets were held hostage by policy makers, both domestically and in Europe, who threatened to change the rules, redistribute risk, and hand-pick winners and losers.
This environment led to uncertainty. The markets expressed this uncertainty in terms of pessimism and volatility. The Standard and Poor’s 500 Stock Index managed to finish 2011 up 2.1%, but both Emerging and Developed International markets saw double digit declines