Though not much is expected to change in year 2010, it will at least be better than 2009. However, the financial markets are not out of danger yet. A major default could send them back into their frozen state of a year ago and take the world economy back into recession.

Although 2010 will be far from perfect, at least it looks a lot better than 2009. The downturn appears to be over, but we think the recovery will be sluggish. Although most of the bad things have stopped happening, there are few good things boosting growth.

Most importantly, the housing market appears to have stabilized. Home prices have now risen for five consecutive months, according to the S&P/Case-Shiller index. Home sales also have continued to rise. We worry that the scheduled end of the first-time homebuyer credit has artificially boosted sales, and we still expect sales and prices to fall off after November. But, the worst appears to be over for sales and prices.

Financial markets are calming down. The stock market has been on a tear since its March low, although it remains down 30% from its 2007 peak. Bond markets are stabilizing, with quality spreads down sharply from their peaks hit this past fall as panic gradually lessens. Even the payment deferrals at Dubai World did not seriously erode the improving picture.

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