Stocks & Markets March 4, 2010, 10:28PM EST

A Year After Meltdown's End, a Changed Stock Market

Indexes have rallied strongly, but investor fears persist. Here's how the investing landscape has been transformed in the past 12 months

By Ben Steverman

S&P 500 index: One-year price chart

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More has changed for investors in the past year than the value of their portfolios.

By several measures, today's conditions in financial markets look quite different from those on Mar. 9, 2009, when the stock market finally stopped a 17-month slide that erased more than half the value of the broad Standard & Poor's 500-stock index.

"People forget how bleak it was at that time," says Martha K. Pomerantz, investment principal at Lowry Hill Investment Advisors. The S&P 500 dived 57% from October 2007 to last March. "Very few people were really brave enough to put money back to work at that point," she says.

Since Mar. 9 of last year, the S&P 500 has rocketed back 66%. (The index still remains 28.3% below its all-time high of 1565.15 reached Oct. 9, 2007.)

While prices have recovered, the effects of the market's roller-coaster ride have been profound. Other market indicators also demonstrate how much equity conditions have changed over the past year. The new environment is evident in stock volatility, investment sentiment, and the relative performance of different types of stocks.

1. Volatility

The Chicago Board Options Exchange SPX Volatility index, or VIX, measures the implied volatility of the S&P 500—how violently it moves from day to day or minute to minute.

The VIX averaged 13.7 in the tranquil years from 2004 through 2006, but the index hit a record 80.9 on Nov. 20, 2008, and remained above 40 last March. Since then, "it's just really been a steady creep down," MF Global (MF) Vice-President Todd Colvin says. One calming influence has been aggressive actions by the Federal Reserve and U.S. Treasury, which Colvin calls a "government-induced safety net."

The VIX closed Mar. 4 at 18.8.

A year ago, stocks bounced up and down wildly on each day's headlines. Recently, headlines about fiscal problems in Europe or weak U.S. economic data haven't had the same effect, says Robert W. Baird's chief investment strategist, Bruce Bittles. "The market has been able to absorb a lot of bad news," he says.

2. U.S. vs. International

A year ago, economists assumed the U.S. would be hobbled by economic and financial problems, making the rest of the world more fertile ground for investments. Now, "relative to international markets, the U.S. is looking more favorable," says Dave Hinnenkamp, chief executive of KDV Wealth Management.

In 2009, U.S. stocks lagged the rest of the world. The MSCI EAFE index, a measure of developed country stocks outside the U.S. and Canada, rose 27.8% last year, and the MSCI Emerging Markets index jumped 74.5%. The S&P 500 rose 23.45% in 2009.

So far in 2010, however, the S&P 500 is up 0.7%, while the other two indexes have lost ground. The MSCI EAFE is off 2.7%, and the MSCI Emerging Markets index is down 2.3%.

Part of this has to do with a stronger U.S. dollar, Hinnenkamp notes, while a credit crisis in Greece has also rattled European markets.

Hinnenkamp and Pomerantz still recommend a healthy international allocation for long-term investors—especially for Asia, where growth prospects are higher and the debt load is lower than in the U.S. or Europe.

3. Growth vs. Value

Investors often split stocks into two categories: Growth stocks are faster growing and more sensitive to the economy, and value stocks are slower growing but more stable and consistent. Value stocks often pay a dividend, while growth companies often reinvest profits in further growth.

In 2009, growth stocks had double the advance of value stocks as investors began to believe the economy was picking up. The Russell 1000 Value index rose 16.3% in 2009, while the Russell 1000 Growth index jumped 34.8%.