Last year was a time ofrecovery cycles, record returns and a fear hangover. Though emerging markets came out the champion, many investors missed the fun as they stuck to safer money market funds, U.S. Treasuries and, yes, even cash. As the year wrapped up, the market climate looked much the same-but danger may be looming.

LED BY FEAR

After lagging stocks in the first three quarters, commodities-including gold and oil-shot up in the fourth quarter, as investors reacted to worries about inflation and a declining dollar. Returns in gold funds plateaued a bit in December, however, as the dollar strengthened.

REITs also benefited from investors' inflation fears. One of the worst victims of the recession, REITs remain a hedge against inflation, says John Eckel, president of Pinnacle Investment Management. "They do better than other asset classes in an inflationary environment because they can increase their rents, so property values should increase as well," Eckel says.

NO LONGER ROARING

Emerging markets, the victor of 2009, wrapped up the year strong. Thanks to a speedy stimulus from the Chinese government and a middle class that is finally rising in the ranks, China-along with Brazil-led the pack last year with returns that left investors agog.

But don't expect such astounding numbers to last, warns Eckel, who says now is a good time to realize some of clients' returns and bring emerging markets back into balance. "The question is, Do we have such strong expectations for growth in emerging markets that it's unrealistic?" he asks. "I wouldn't expect to see the same kind of growth in 2010 we saw in 2009."

A slowdown in these markets was already becoming apparent in the fourth quarter. The Direxion Latin America Bull 2X Fund, for instance, returned 193.5% for the year, but only 23.8% for the quarter-an impressive number, but not the Brobdingnagian quarterly returns we saw in the first half of 2009. The Dreyfus Greater China Fund also jumped 119% for 2009, but just 16.92% for the quarter.

FIXED-INCOME FRENZY

Sick of minuscule yields, investors yanked dollars out of money market funds in record numbers-$371 billion last quarter, or 11% of the funds' assets. "Right now you get less than 0.5% on a one-year CD or money market fund-so why keep the money there?" says Vincent Deluard, global equity strategist at TrimTabs. "In some ways it's also a reflection of the risk appetite going up. At the high end of the crisis last year, people were just begging to keep their money; they didn't care about the yield. Now people are more rational."

Much of that money went to bond funds, which took in $113 billion last quarter. That could be disastrous in an environment of bottomed-out interest rates that are sure to rise eventually. "If you put your money into bond funds, you become more sensitive to interest rates," Deluard notes. "If rates go down or stay the same, you do well. But they're as low as they can go, and if they rise, you're screwed. It's worrying to see so much money go into the bond sector when interest rates are so low."

Further, yields on the fixed-income vehicles investors flocked to last year, U.S. Treasuries, plunged in the fourth quarter. Is the next bubble brewing? "We went into the year believing U.S. Treasuries were overvalued because interest rates were pushed to scary levels and that's probably still a danger," Eckel says. "Interest rates will rise over the next year, and concerns over inflation will keep returns on U.S. Treasuries low, if not negative. I do think they're the next bubble."