— "The Financial World According to Inya" Column, by Inya Ivkovic, MA

North America has been hit with the longest and the worst recession since WWII. Yet, North American markets staged such a spectacular rise from the ashes, by which the best of phoenixes would be impressed. It is also the big paradox many are still struggling to reconcile into a neatly packaged box. Then, there are lesser paradoxes that are also very much related, such as when beaten job markets show signs of life, stock markets do not know what to do with that information, so they end up trading in complete disorder.

For example, investors who pursued safety in gold and bought shares of skyrocketing gold producers last week got slapped in the face when more positive economic data surfaced relatively unexpectedly, driving most gold stocks down. Losses were not large, mostly single-digit percentages, but they were losses nonetheless. Foreign investors also got a bit of a shock when milder-than-expected job losses in the U.S. ended up pushing the U.S. dollar up, resulting in foreign markets struggling to find their true north.

How are investors, or anyone for that matter, to make any kind of sense of such confusing markets? One theory floating around entertains the idea that what we have seen in the past year and a half was nothing more than what we have already seen with previous cycles, only on steroids.

The main reason for the confusion in such fast-moving markets is that things are developing so fast that market participants do not have enough time to process new information and to react appropriately. That being the case, the biggest story next year will still be the job growth in the U.S., or lack thereof, as long as investors keep in mind that most of it may already have been priced into the recovery.

Starting with interest rates, the turbo-fast recovery of the past 18 months has created an expectation of interest-rate hikes in 2010. The first signs are already here. On Friday last week, yields on U.S. treasuries were 10 basis points higher than rates on short-term bonds and eight basis points above long-term bonds. Additionally, the Fed, the Bank of Canada and the Bank of England are expected or already have made announcements laden with language about interest-rate increases halfway through the New Year.

Another factor investors should watch for is the inverse relationship between the U.S. dollar and the stock market. This is a simple relationship to grasp, but what is disturbing about it these days is that the two have found themselves the most diverged from one another in the last three decades.

The greenback is probably the most shorted security now. The downside, however, is that stock markets may already be peaking and any countertrend in the U.S. dollar could be costly. Next year, investors should watch particularly for energy and financials, which should appreciate in 2010, energy driven by the weak greenback, and financials driven by subsiding fears of inflation in the short term.