Marking the one-year anniversary of the Lehman Brothers demise, risky assets last week again marched higher to the tune of economic data supporting the argument of a global economic recovery. A realization among investors that the economic transition from recession to recovery was gaining momentum resulted in many global stock markets scaling fresh peaks for the year.

Ben Bernanke, Federal Reserve chairman, on Tuesday said the US recession “is very likely over.” However, he remained cautious about the shape of the recovery and said he expected a “moderate” recovery in 2010 with growth “not much faster than the underlying potential growth rate of the economy,” i.e. approximately 3%.

“At the moment we don't see (the economy) getting better or worse, but that's better than you could say six months ago,” added Warren Buffett. “The terror of last year is gone and that's thanks in part to the government.”

Not only did the US stock market indices record up-days on every day except Thursday, but all ten economic sectors that make up the S&P 500 also closed the week in the black. Most other stock markets (mature and emerging alike) commodities, oil, precious metals, high-yielding currencies, and corporate bonds also put in a stellar performance as a bullish mood prevailed.

The CBOE Volatility Index (VIX), or “fear gauge,” traded at about the same level (23.9) as before the Lehman bankruptcy in September last year. Also, government bonds and other safe-haven assets such as the US dollar and Japanese yen were out of favor as investors sought higher returns elsewhere.

As investors started assuming more risk since March, the US Dollar Index headed lower, hitting a one-year low last week and trading in a confirmed downtrend as far as primary trend indicators are concerned. The combination of low interest rates and quantitative easing has made the US dollar an attractive currency for funding carry-trade transactions (i.e. selling low-yielding currencies to finance the purchase of higher-yielding currencies). (Click here for a short technical analysis.)

The declining dollar, central bank purchases, the de-hedging by gold producers, and rising inflation expectations served as catalysts for gold bullion’s strength, causing the yellow metal to close above the $1,000 level for the sixth consecutive day on Friday. While gold’s move grabbed the headlines, platinum (+42.5%) and silver (+50.5%) have actually outperformed gold (+13.9%) significantly since the start of the year.



The past week’s performance of the major asset classes is summarized by the chart below -- a set of numbers that indicates an increase in risk appetite.



A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (+1.8%) and MSCI Emerging Markets Index (+2.8%) both made headway last week to take the year-to-date gains to +23.8% and a staggering +62.1% respectively. These indices are still more than 30% down from the 2007 highs, but markets such as Mexico (-8.8%) and Chile (-5.8%) have almost wiped out all their financial-crisis losses.

The major US indices extended their gains to two consecutive weeks, marking eight up-weeks during the past ten weeks. The year-to-date gains are as follows: Dow Jones Industrial Index +11.9%, S&P 500 Index +18.3%, NASDAQ Composite Index +35.2% and Russell 2000 Index +23.7%. Interestingly, since the NASDAQ Index was created in 1971, only 1991, 1995, and 2003 have seen bigger year-to-date gains.

While the indices have gained considerably from their lows, they still have to rally by between 6.0% (Russell 2000) and 17.2% (S&P 500) to reach the levels of the Friday (September 12, 2008) before Lehman's collapse.