Weak outlook for stocks, economy

A double-dip recession still seems unlikely, but the mid-year forecasts I've seen are not very encouraging. Here's a snapshot of what many economists are saying:

1)Growth will continue - but slowly. They're talking about GDP in the 2.5 percent to 3 percent range in 2010, which is not great and well below the jump-start that's needed (and that typically happens in a recovery).

2)Unemployment will fall - but not by much. Expect double-digit rates in California for at least another couple of years. Companies are not looking to expand - not now anyway - and if there's no expansion, there are not many new jobs.

3)New federal stimulus plan? Still an iffy prospect, especially in an election year, but you're starting to see more economists factor a second round in their forecasts. The first stimulus package has been effective on many fronts, but the jobless numbers are a killer.

4)Rates stay low. Actually, very low. Don't look for the Fed to even think about raising interest rates until late this year or early next.

5)Stocks will keep slumping. You never know with Wall Street, but it's hard to find anyone expecting the market to recover from its recent slump. Investors are steering clear, even if it means sticking to cash (see Tom Petruno's LAT column)

Barron's publishes its mid-year roundtable this weekend, and the prevailing mood is definitely on the sour side. Investment manager Felix Zulauf provides an especially grim forecast that unfortunately rings true:

The world is at a major crossroads. Some countries are at the end of a dead-end street. Greece has hit the wall. Spain and Hungary probably will be next. The Greek debt crisis was the beginning of markets refusing to finance irresponsible public-sector indebtedness. It will travel from the periphery to the center in coming years. The common denominator in the housing crisis, the euro crisis and the banking crisis is that industrialized economies carry too much debt. These crises show that we have to rewrite our system. We have been living a fiction for the past 20 years in order to enjoy a greater standard of living. Hard times are ahead, and the steps that Europe has announced to contain its crisis are only the beginning. Governments must cut spending and promises, such as entitlement programs, and raise taxes. At best this means stagnation for some years, but it could be much worse. Deflationary pressures will increase.

None of this sounds good for the stock market.

The U.S. is in better shape than the rest of the world at first glance, but half the states are running larger deficits than Greece. The market is naïve in assuming the earnings models of the past 20 or 30 years can be extrapolated out to the next five years. The market will hit a lower low than it did in March 2009. What was missing last year was the complete desperation and turning away from equities as an asset class that marks the end of a secular bear market. That will come. European and U.S. policymakers believe China eventually will bail us out, but China is tightening. Its real-estate sector will get hit badly. All the leading indicators are topping around the world. Commodity prices are heading lower. The stock market probably will make its low for the year in late summer or fall.