Lehman Brother's collapse was a true marker of the beginning of concern, panic and frantic uncertainty regarding the US financial system. Prior to the collapse, the S&P had taken about a year (late 2007 to late 2008) to recede from its all-time high (around 1540) to 1250, representing nearly a 20% correction. Bearish, yes. Unheard of, by no means.
Then Lehman occurred, and the S&P spent the next 6 months plummeting to its 666 level, representing approximately a 46% drop from the 1250 level.
With the introduction of TARP and US backing of the financial system (at ANY cost, literally), the markets began their rally which has now been on-going for 21 months. And where are we at currently? 1258 on the S&P.
The answer = restored capital and, consequently, confidence in the US financial system.
Not the answer = a dramatically improved financial condition of the US deficit or the US economy as whole.
To interpret the recent bull run back up to 1250 levels as a "recovery" of the US economy is a mistake. While the economy is on surer footing due to the stability of the financial system - certain regulatory and systemic actions are still needed. Meanwhile, political partisanship and easy money policies threaten to exacerbate and re-ignite the same fuse that burned the US economy 2 years ago. Tomorrow? No. But eventually, unless actions are taken.
I simply think its important to recognize that evaluating the stock market (and its gains) off the 666 S&P level may not be truly fair. Panic and uncertainty exagerate losses. Perhaps its the 1250 level and what 2011 brings (both in terms of gains and/or political action) that will be most telling.
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