Just more than a year removed from the near collapse of the U.S. financial markets, economists say 2010 will bring more stability, but joblessness will remain a major obstacle to full recovery. With unemployment topping10% and little hiring on the horizon, Main Street will remain cautious
“We think the unemployment rate is going to keep rising through next summer, peaking at 10.6%,” said Marisa DiNatale of Moody’s Economy.com. “We think the extent of unemployment is the greatest risk to recovery.”
DiNatale says that until consumers regain their confidence in the job market, spending will stagnate. The good news, DiNatale says, is that while hiring has not rebounded, layoffs seem to be slowing as employers adopt a wait-and-see attitude for the coming year.
“The data that would tell you about layoffs, such as initial jobless claims, look a lot better; the problem is all of the data we have to suggest whether firms are hiring still look pretty bad,” she said. “There is a lot of uncertainty surrounding policy next year. Firms are reluctant to hire until they know what fiscal policy is going to look like.”
That view is bolstered by a recent survey by Careerbuilder.com of 2,700 hiring managers and human resources professionals, which showed that only 20% plan to add staff in 2010. While bleak, that number is up from 14% in 2009.
A wind down of government stimulus programs also presents a wild card of sorts for 2010. Much of the economic growth of the past year has been a result of the billions pumped into the economy by the government. As those programs begin to wrap up, economists say the economy could experience another dip.
"You are going to get a little bit of a drag on GDP when all of that stimulus money expires," DiNatale said.
In the markets, investors can take heart that the rally that shoved the Dow Jones Industrial Average up more than 60% from its March low, and 20% on the year, will continue in the first half of the year, but a withdrawal of federal stimulus money will mean a mid- to late-year selloff.
“Our expectation for 2010 is that we will see some carryover in the first part of the year,” says Paul Nolte, managing partner of Dearborn Financial. "We’ll probably see the markets trail off in the third and maybe into the fourth quarter as we see some of the stimulus being withdrawn and the Fed pulling back on some of its policies.”
Nolte says that by year end the market is likely to be plus or minus five percent from Thursday’s close.
“It’ll be a lot of excitement for not a lot of gain.”
Sectors to watch include defensive plays in the healthcare, consumer spending and even utility fields, Nolte says, while basic materials and industrials will fall off.
But bond buyers beware; a meltdown is on the way, say some strategists, citing the steepening yield curve. Earlier this month, the spread between yields on two-year and 10-year notes reached a record 287 basis points. Couple that with a 13-to-1 investment in bond mutual funds over stock mutual funds in the past 15 months and you have a bubble about to burst, says Dan Deighan, founder of Deighan Financial Advisors.
“This bond bubble is going to burst because interest rates keep moving up and that’s causing the fair market value of all of those bonds to drop,” said Deighan said. “There is a huge supply in the treasury market, but the demand is light.”
Deighan says investors would do well to stay away from bonds and have bond heavy portfolios evaluated for alternatives.
On the energy front, analysts expect upheaval in Iran to be a wild card for oil prices, while increased demand out of India and China could push prices past the $85 mark.
“Obviously geopolitical political concerns are the key there,” Tim Jennings, president of Vantage Trading, told Fox Business. “The other thing to think about is some of these new discoveries if they come on line and increase the supply that could have a negative impact on prices.”
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