HOT TOPIC = What’s Ahead for 2010?

The U.S. economy is expected to grow a respectable 3% in 2010, according to a consensus of economists who are polled on a regular basis by The Wall Street Journal.1

What else do experts think will happen in 2010? Here’s a roundup of what’s scheduled, expected, and predicted.

The Recession

Something most people will be looking for in 2010 is the end to the economic recession that began in December 2007. The average duration of each U.S. recession that has ended since 1945 was about 10 months, although the longest was 16 months.2 That would make the end of the current recession long overdue by historical standards.

But don’t hold your breath waiting to hear the recession is over: In the past, the National Bureau of Economic Research, the nation’s official recession timekeeper, has taken an average of 15 months after a recession is over before it makes a pronouncement to that effect.3

Inflation and Interest Rates

Inflation is not expected to be much of a threat to economic activity and should remain in the range of 2% at least through 2010.4 And because inflation plays a dominant role in the Federal Reserve’s decisions on interest rates, it seems likely that rates will remain near their current levels.

Unemployment

Few economic indicators are more important or more visible to Americans than the unemployment rate. As long as it remains above the 5% to 6% range, any economic recovery might not feel like much of a recovery at all. And yet, the jobs picture is expected to remain bleak. In The Wall Street Journal’sDecember 2009 economic forecasting survey of 51 economists, the average forecast was for a 9.6% national unemployment rate by December 2010. Just four of the 51 economists surveyed expected the unemployment rate to dip below 9% by then.5

Taxes: Income, Capital Gains, Dividends, Inheritances

A bundle of favorable federal tax laws that were passed in 2001 and 2003 are scheduled to expire after December 31, 2010. If Congress takes no action to extend these tax laws, we can expect higher tax rates on income (up to 39.6% from the current top rate of 35%), long-term capital gains (up to 20% from the current 15% rate), dividends (up to 39.6% from the current 15% rate), and inheritances (0% in 2010 but then up to 55% in 2011 on estates larger than $1 million).

Given that 2010 is an election year, taxes are going to be a touchy topic. Because tax rates are slated to rise automatically in 2011, the debate could take an unusual direction. Proponents of higher taxes will need only to scuttle any new legislation to extend the lower rates, while low-tax proponents will have to muster the political will to pass tax cuts despite the fact that the federal government is facing a huge national debt and growing obligations to entitlement programs such as Social Security, Medicare, and federal employee pensions.

Financial Markets

There is never a way to predict how the financial markets will perform — something that was on full display in 2009. The year began in the midst of a nasty bear market that took the Dow Jones Industrial Average to near 6,500 by March.6 You might recall those tense early months of 2009, when the market seemed determined to test a new low every day, with no bottom in sight. It’s unlikely that you expected the market to recover to 10,000 by October and soon after would be posting year-over-year double-digit gains — yet that’s exactly what happened.7

Attempting to predict how the stock market — or any investment — will ultimately perform is a great way to waste time, but hardly the best method for reaching your long-term goals. Investments seeking to achieve higher returns also involve a higher degree of risk. Shares, when sold, may be worth more or less than their original cost.

It’s a good idea to keep an eye on what is on the horizon, but it’s no substitute for following a long-term strategy based on your personal situation, risk tolerance, time horizon, and investment objectives.

1, 4) The Wall Street Journal Economic Forecasting Survey, December 2009
2, 3) National Bureau of Economic Research, 2008
5) The Wall Street Journal, December 11, 2009
6, 7) Yahoo! Finance, 2009. Dow Jones Industrial Average for the period 10/1/2008 to 12/14/2009. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.

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