The federal government may have dodged a bullet with President Barack Obama’s eleventh-hour signing Tuesday of legislation raising the debt ceiling, but the economy still appears to be riddled with holes.

And Thursday’s market sell-off amid recession fears shows that investors are still quite worried about the direction in which the economy is heading.

Consumers’ reluctance to spend and employers’ unwillingness to hire slowed down local stock experts during the second quarter of the Star-Advertiser’s 10th annual investment contest. That left the experts apprehensive about the market’s prospects for the remainder of the year.

"The debt limit increase doesn’t change the picture, which is at its core dominated by politics," said Norm Caris, a Kauai resident and managing director for institutional sales for investment bank Caris and Co. "Obama is still talking taxes, which is a confidence-killer.

"If business is still paranoid over liberal policies and government overregulation, including health care costs escalating, then we will continue to disincentivise innovation and create a situation where the next important technology will not be invented in this country."

Richard Dole, CEO of Honolulu investment adviser Dole Capital LLC, said the deal reached by Congress to raise the debt ceiling and cut more than $2 trillion in public spending over the next 10 years could be problematic.

"Less government spending without a corresponding increase in business activity could push the economy into another recession," Dole said. "At the moment there are few signs of a double-dip recession, in the face of strong earnings from U.S. companies. I think the stock market … will soon find a bottom and consolidate."

Amid all the economic uncertainty, it was a tough second quarter in the contest for the local stock experts.

Dole had the only profitable quarter and took over the contest lead with a six-month gain of 12.4 percent. That pushed his hypothetical $20,000 portfolio to $22,475.22.

First-quarter leader Dwight Melton, co-founder of the Hawaii Stocks and Options Group and a three-time contest winner, came back to earth as he reached the halfway point up 4.9 percent at $20,970.72. That’s a comedown from a 27.2 percent increase in the first quarter.

Caris barely squeezed out a six-month gain as his portfolio rose 0.8 percent to $20,156.16. Barry Hyman, private client group vice president for the Maui branch of FIM Group Ltd., was the only local stock expert in negative territory with a 10.5 percent loss to $17,910.57.

Dole said even though raising the debt ceiling averted a U.S. government default on its debt, other implications of the debt crisis remain and will likely affect the economy.

"The U.S. so far has been able to avoid a downgrade of its Treasury debt from its current AAA status," Dole said. "A downgrade may not cause interest rates to increase because expected budget cuts might instead keep interest rates low."

Dole’s two best performers last quarter were both Hawaii stocks. Alexander & Baldwin, parent company of ocean shipper Matson Navigation, rose 6.2 percent from April to June while Territorial Bancorp, the holding company for Territorial Savings Bank, gained 4.5 percent.

"No asset class is risk-free in the current economic environment," Dole said. "I don’t expect the stock market to do much of anything over the course of the year, given a slow-growth economy."

He said U.S. equities compare favorably with other asset classes in spite of the expected slow growth.

"There seems to be bubbles brewing in other asset classes, but not the stock market indexes," he said. "The 10-year U.S. Treasury bond yield barely matches inflation. Gold and silver prices continue to soar, as if we are going back to the gold standard."

Melton’s penchant to invest in the hottest sectors backfired in the second quarter as his portfolio plummeted 17.6 percent during the three months.

His four index picks — oil and gas, natural gas, energy and silver — all fell by double-digit percentages during the quarter with the ProShares Ultra Silver exchange traded fund declining the most at 26.7 percent.

He said increasing the debt ceiling should have only a minor impact on the economy for the next two years since almost all the cuts would be made in 2014 or beyond.

"Delaying the deepest cuts buys time for the economy to recover," Melton said. "Right now it can’t absorb shocks very well: Unemployment is still 9.2 percent, people are spending less, worker pay has stagnated and economic growth is the slowest since the end of the recession in June 2009."

Caris’ portfolio dipped 2.1 percent last quarter after being dragged down by a 31.9 percent decline by Collective Brands, the parent company of Payless ShoeSource. Intel was his top performer with a gain of 10.7 percent. He added Ford to his portfolio for the third quarter, calling it "the best of the automakers, trading at a depressed valuation." His other new addition for the current quarter was Broadcom, the supplier of communications chips for Apple’s mobile devices.

"U.S. companies are spending money on improving their technology, and the explosion in mobile devices, cloud computing and social media is driving secular growth in the tech sector," Caris said. "As commodities sell off and component costs get cheaper, tech becomes one of the most favorable places to be."

Hyman, the two-time defending contest champion, saw all his picks fall in the second quarter en route to an overall 13.5 percent decline during the period. His best pick was Hong Kong developer Cheung Kong Ltd., down 8 percent, while Gaiam, a lifestyle marketing company, brought up the rear with a 24.7 percent decline. Despite watching all his picks fall, Hyman said he didn’t make any changes in his portfolio for the third quarter.

"The economic weak patch is not alarming, and I think the market is overreacting," he said. "We are in a long-term ‘muddle along’ environment created by the excessive amount of public and private debt. Raising the federal debt limit is a nonevent. The debt itself is the problem. It will take years to work that debt down."

Hyman said as a result of the debt issues, the economic expansion has been slow and uneven, and that recent slowness is due to additional short-term head winds caused by natural disasters in the first half of the year.

"It will likely be followed by a spurt in the second half as manufacturers play catch-up," he said. "The hysterical rhetoric coming out of Washington and the press has caused consumers to clamp down on spending. But I suspect this will be short-lived. … In contrast to consumers and governments, many corporations are in excellent shape and positioned well. … This combination of healthy corporations and fear-based panic selling of stocks is creating an excellent opportunity for selective investments."