NEW YORK -- U.S. and international regulators are widely credited with having saved the global economy from plummeting into a second Great Depression, and the fragile, recovering economy can expect to see continued support for much of 2010, experts say.

This support could help stocks rebound anywhere from 2% to 12% this year, depending upon whom you ask, but markets can always defy expectations.

"Policymakers have calibrated the policy to match the crisis," said Ethan Harris, head of North America economics and coordinator of global economics for Bank of America Merrill Lynch Global Research. "We are very dependent on continued maintenance of super-easy policies. The Federal Reserve does not want to shock the capital markets. They will continue to add resources if we enter a double-dip recession."

While this support will make the U.S. an anchor for the rest of the world, strategists like Robert Tipp, chief investment strategist for Prudential Fixed Income Management, think the U.S. will see annualized growth between 2% and 2.5% for 2010, much lower than the average 8% gain that typically follows a deep recession.

Consumer spending normally grows by 4.5% after a recession, but Tipp said he expects it to grow by a much more modest 2% to 2.5% this year, thanks to the huge overhang of supply and debt in real estate.

"It will be very easy to outperform 2009," Tipp said, but "the Fed will have to continue to nurse the economy throughout 2010."

The Fed is backing away from the mortgage market, he said, and people will be surprised by how quickly debt begins to come down.

"It will be a good year for fixed income," Tipp said, but a tremendous amount of cash still remains parked in money market funds, which currently top $3.27 trillion. "High-quality, high-yield opportunities look very attractive and the future for the U.S. dollar has never looked better," compared to other currencies, he said.

Emerging Markets

Experts say the strongest growth this year will occur outside the U.S., particularly in emerging markets like Brazil, Russia, India and China.

But some analysts warn against a repeat of emerging markets' 72% return in 2009, making them the No. 1 performer of the year. "Emerging markets like India have much more room for growth, but they also have their own set of problems," said Ed Keon, managing director and portfolio manager for Quantitative Management Associates. India's young population could cause big pullbacks along the way, he said, and as more workers become highly skilled, their demands for higher salaries could offset the benefits of outsourcing.

"I still think that emerging markets and Europe will continue to outperform the U.S. and Japan," said John Praveen, managing director and chief investment strategist for Prudential International Investment Advisers.

Praveen anticipates solid, sustained gross domestic product (GDP) growth in the U.S., driven by the huge fiscal stimulus package, continued low interest rates, inventory rebuilding and a housing recovery. GDP should grow by approximately 3.3% this year, he said.

"Equity markets will continue to enjoy the macro sweet spot of gradual, steady GDP growth, benign inflation and low interest rates," Praveen said. "Unemployment is not in a downtrend, however, and any rate increases are very likely to be in the late part of the year. Both GDP growth and earnings are likely to surprise, and we will see further stabilization."

There is still a significant, pent-up demand in the housing market, Harris said, and a glut of new, empty homes.

"Expectations in home prices will have to stabilize," he said. "We will have to work through the bad debts in financials and get labor markets growing again."

Bob Doll, the global chief investment officer for fundamental equities at BlackRock, thinks U.S. corporate earnings growth should jump about 20% this year, fueled by low inflation, a declining dollar and expanding markets in the developing world. As a result, Doll optimistically thinks the S&P 500 should rebound by 12% this year.

Contrarians, by their very nature, will bet on the opposite happening.

"Bull markets are born on bad news and die on good news," said Quincy Krosby, chief market strategist for Prudential Annuities.

Money managers will need to do serious homework and fundamental analysis in 2010, she said. Investors should stay diversified and look for solid, predictable bets, and be wary of the tug-of-war between bears and bulls.

"The easy money has already been made," Krosby said. "The liquidity-driven rally will move more to one based on fundamentals. Hopefully, there will be enough bad news to go around to keep investors diversified."

"We believe the U.S. recovery is for real, but the economy will grow at a pace slower than that of a typical recovery," Doll said. "From here on, the market will be driven primarily by gains in corporate earnings and real advances in the economy, not by global policy action, liquidity issues or relief that the world has avoided a depression."

He said structural issues still present problems, such as the ongoing consumer deleveraging, deteriorating loan quality in the banking system and the uncertain regulatory environment.


Keon is relieved, for now, that Congress hasn't rushed through any hasty regulations in reaction to the financial crisis and appears to be taking its time in crafting any major changes.

"I hope we do go slowly and craft sensible, carefully thought-out re-regulation," he said. "It's more important to get it right than to do something in the heat of passion. We should think of the unexpected consequences. I suspect that any new regulations that are being proposed will be dramatically different by the time they become law."

Experts note that Congress took a decade to craft the Investment Company Act of 1940 following the Great Depression, and that legislation is still with us. Changes should be carefully considered, with the understanding that some things are simply beyond our control.

"Cycles happen, and you can't eradicate that through regulation," Tipp said.


(c) 2010 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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