Fear is the new name of the investing game. It's what drove investors to take $527 billion off the table in May, and it's what continues to rattle the market, with the Dow's 268-point drop on Tuesday and second 115-point decline at deadline two perfect examples.

Fund economists and fund managers believe the recovery is for real. This, even though recent bearish news on job growth and consumer confidence has pushed the Dow Jones Industrial Average down 11.6% from the end of April, when it stood at a record 11,181.30. At deadline, the Dow was trading at 9,668.97.

Certainly, this faith that the economic recovery will continue is worth putting in context of the market's 65% increase in 2009.

Fund managers are predicting stocks could rise 10% to 20% or more in 2010, even though year-to-date, the market is negative 7.27%. These experts acknowledge that the debt saddling the U.S. and other developed nations, particularly in Europe, are a real concern, but they all point to valid steps the European Central Bank is taking to solve the Greek credit contagion. Fund managers also believe that while oil prices are increasing, the market has already factored that in.

Thus, all of these problems, while real, will not stand in the way of a continued U.S. rebound, according to some of the best minds in the business.

"The economic recovery is in progress," avowed Nick C. Thakore, Putnam Investments' head of U.S. large-cap equities and manager of the Putnam Voyager Fund. "The corporate earnings story is tremendous. None of the negatives, including taxes, preclude the recovery."

Thakore said he correctly predicted a sharp cyclical recovery last year, driven by the stimulus package. At present, he sees the main catalyst being slim inventories catching up to sales and corporations that have overdone it in laying people off. He believes a gradual improvement in jobs and cash flow will emerge as two of the key pillars of the recovery.

"Corporations really streamlined how they run their businesses," Thakore said, and increased productivity will add further sparks to the recovery.

Still, there were many devil's advocates at Morningstar's Chicago conference. "How many people have money in money market funds?" asked Rudolph Ried-Younes.

The answer: Nearly $3 trillion, $2.78 trillion, is in money funds, according to the Investment Company Institute. That money, parked very firmly on the sidelines, along with the $1 trillion that corporations have stashed, is giving economists at leading asset management firms grave concerns.

On the one hand, if this $4 trillion is pumped into the market-through research and development, mergers and acquisitions, stock buybacks, higher dividends and entrepreneurial activity-the economy and the markets win. On the other hand, if this capital stays sidelined, the economy could stall, inflation becomes unmanageable and deflation could even kick in.

On the other hand, mutual fund portfolio managers and strategists from such companies as Bank of America Merrill Lynch and Neuberger Berman are more sanguine, if not outright confident, than the economist community about the state of affairs. Perhaps it's their bottoms-up, microeconomic approach to picking stocks and sectors that is buoying their faith in American drive.

Ethan Harris, head of developed economics research at BoA Merrill Lynch Global Research, expects GDP growth of 3% for 2010. From his perspective, "Inflation is not an issue because it always drops during a recovery, and there is massive spare capacity. Central Banks will keep their eyes firmly planted on recovery and growth."

Bill Miller of Legg Mason, meanwhile, pointed to dozens of blue-chip U.S. companies at Morningstar's closing session on "Monster Stocks." AOL, Apple, Chesapeake, Conoco, Dell, Fannie Mae, Ford, IBM-all came up continuously.

In fact, Ford put its money where its mouth is on Tuesday, by slashing its $31 billion debt with $4 billion in cash to retire a large portion of its healthcare debt. Ford said it wants to strengthen its balance sheet and is on track to deliver solid profits and positive cash flow this year.

However, Paul Kasriel, senior vice president and chief economist at Northern Trust, speaking at a media briefing just ahead of the Morningstar conference in Chicago late last month, said: "I believe the recession that started in 2008 will continue. Growth will be subdued. The financial services industry is out of the intensive care unit but not out of the hospital [although] it has the biggest headwinds."

At investor and media presentations last month, the U.S. trade deficit and $787 billion debt were the two biggest concerns.

Steve Romick, partner, FPA, Los Angeles, said he has a "dim view of the federal on-balance sheet and off-balance sheet liabilities. State and local governments have underfunded pension plans, and fiscal policy is [not working]."

Romick added: "A lot of people are calling for inflation as a fait accompli. Clearly, there is deflationary pressure. Other people say we are merely funding our overindulgent lifestyle through foreign investors buying our national debt, which will top $3.7 trillion, or 48% of GDP, in 2010. To absorb that, $6.5 trillion to $7 trillion in debt needs to be bought."

As the deficit is worked through, higher interest rates will mean lower valuations, Romick continued.

Certainly, pessimism ruled at the Morningstar June 23-25 2010 Investment Conference.

Speaking on the U.S. deficit problem, Kasriel said: "The Fed has created a tremendous amount of credit, but something is broken between the Federal Reserve and the general economy. Reserves are not being transferred to true credit." As a result, Northern Trust's chief economist foresees the U.S. money supply growing 2% or less and "another wave of losses likely to come from commercial real estate."

On the other hand, if consumers and businesses act on their pent-up demand and stimulate the economy, Kasriel said, "We could see a real credit boom in consumer price inflation and asset price inflation."

But for that to happen, corporate America needs to wake up and realize that the $1 trillion in excess cash reserves earning 25 basis points could be better invested to create $1.3 trillion, Kasriel said.

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