(MONEY Magazine) – The early months of the new year have proved to be as stubbornly unpredictable as 2001. The long-awaited V-shaped recovery never happened. The January effect never kicked in. Instead, we see scattered signs of improvement in the economy, no clear direction in the markets and a federal criminal investigation into the biggest and surely most tangled bankruptcy in our nation's history. And we're not even through the first quarter. Most savants make predictions in December, when the holiday cheer can overly brighten their perspective. This year I waited until the winter gloom took over to collect the forecasts of some of the best minds on Wall Street and in business. It just seemed fitting, in light of all that happened in 2001, to view the future of the markets and the economy in somewhat less celebratory terms this year.

First, a view from the capital. Political analyst Leslie Alperstein of Washington Analysis says, "Without question, the overarching focus in Washington in 2002 will be the November elections, when the GOP will try to hang on to its six-seat House majority, while the Democrats try to keep their one-seat majority in the Senate. Virtually everything the Bush administration and Congress say and do will be geared toward influencing the outcome and will impact stock prices. President Bush will stress security--safety at home, energy independence, the economy, health through lower drug prices and expanded coverage, and a new farm bill." But Alperstein says that Democrats will be able to exploit some issues of their own. "Democrats will push health issues, energy--emphasizing alternative sources, more jobs and health benefits. The economy will be expanding, but the new deficit will have invaded both the Medicare and Social Security trust funds, giving the Democrats a good campaign issue."

Corporate earnings growth may not be as robust as some people hope, according to First Call's Chuck Hill. "We're finally seeing a deceleration in the rate of negative earnings pre-announcements by companies and of downward earnings-estimate revisions by the analysts," he says. "That gives us confidence that earnings will be on an upward trend by the second quarter. But the real issue now is what is the slope of the earnings recovery?" Hill warns, "The danger--particularly for technology--is that the analysts may be gauging their estimates by how fast earnings recovered in prior recessions. But this recession has been different from any of the other post-World War II recessions. Instead of too much demand chasing not enough capacity, this recession was the result of the easy-money policies of the late '90s, which led to too much capacity. The danger--again, particularly in technology--is that it may take longer to come back at a slower rate." Hill adds, "Another reason this cycle may not be comparable to recent earnings recoveries is that consumer spending never fell off as much as it usually does and, therefore, there's not that much room for a bounce back."

In terms of the economy, former Fed governor Wayne Angell gives a cautious outlook. "The U.S. economy is in the first recession that we've had since 1990-91. This one is much more difficult, because it's a capital-goods-downturn-led recession, not just an inventory correction. Consequently, we're not going to get the V-shaped upward rebound that we ordinarily get, and that means the unemployment rate is going to rise throughout 2002. The good news is that labor productivity is much stronger than it's ever been in a recession. But that means that corporate profits will come back faster than will a significant growth in employment." As far as a rebound in the economy, Angell says, "A full recovery is going to be rather gradual--end of 2003 into 2004."

When it comes to the markets, John Manley, the managing director/U.S. equities strategist at Salomon Smith Barney, takes a more upbeat tone. "I think recovery of confidence, recovery of expectations and the sense that the U.S. economy can grow again will be the biggest surprise," he says. "The way I look at it, if it's cyclical, it's good on balance. If it's not cyclical, I'm not that interested in it. Energy should do fairly well. I think technology and communications--you have to be careful--but there are some real businesses here that are cyclical in nature, and in the first half of the year they could do very well playing to recovery. Valuations are high in some cases. That may cause problems in the second half. But for the time being, there's still increasing productivity in America and that should be a plus for them." Manley also likes financials, which tend to do well in an economic recovery. Overall, Manley forecasts the Dow to be somewhere around the 12,000 level by the end of the year, maybe a little bit higher. In terms of Enron's effect on the markets, Manley says, "I think there's an analogy with the terror attack on the Trade Center. Not that this will be anywhere as damaging. That [terror attack] was and is an open-ended issue. But it was one the market came to discount very, very quickly. I think [the Enron fiasco] will get discounted fairly quickly as well. Everyone will do their due diligence. Everyone will look for problems. They will probably be found within the next month or two. But then I think the pace of bad news will start to slow down. One thing to emphasize is that I think what will happen is you will see flaws in the system that developed and that were exploited--they'll be fixed. There's always a positive in that."

No sector will be under more scrutiny than technology. Marc Klee, co-portfolio manager of the John Hancock Technology fund, takes the optimist's view. "I think when we look back on 2002 at the end of the year, the headline is going to be that technology stocks were one of the best places to invest in the stock market," he says. His rationale? "Technology companies have always been and continue to be cyclical companies. They sell goods and services that are expensive, and [purchases of] expensive products are deferred during periods of economic weakness. That has hurt these companies. The second thing that hurt them was the valuations. Technology stocks had a great run from 1998 to 2000, and valuations got very extended. But valuation per se is not what drives stocks. They need a catalyst. And I think that when people look back at the end of the year, they're going to say the catalyst that drove stocks up and started the run was the reverse of the catalyst that started the downturn in March 2000: The market looked ahead and saw an economic recovery and said that technology companies would benefit from it." Klee expects that the tech sector's gains will be muted, however: "I do not believe technology stocks are going to return to their former glory. While I think we'll look back and say it was a real good year for technology, that's a good year in the context of a normal environment, not in the context of the 1998-2000 time frame."

As for my own view: The economy will sputter but grow, eventually kicking into gear by the second half of the year. The recalibration in the markets will continue, but the process of recovery will be slow and certainly disappointing to investors dreaming of the bygone days of double-digit returns.

We just don't have enough information yet to know the full fallout from the Enron outrage--whether the scandal will reach beyond the companies directly involved and taint the Republican and Democratic parties. But I believe that analysts and investors will be increasingly skeptical of corporate managements. The only way to avoid a crisis of confidence is for all of us to insist on real reform in the governance of corporate America and in the relationship of corporations to their auditors.

We may also need a full examination of an outdated accounting model that is too easily manipulated by those who do not have the best interests of their investors, the markets and, indeed, the country at heart. So 2002 promises to be not only a year that brings us economic recovery but one that offers us the opportunity for real reform that will be the basis of even stronger markets in the years ahead.

Lou Dobbs is the anchor and managing editor of CNN's Lou Dobbs Moneyline.