Economic News Comment for Thursday 10/29/09

The first estimate for the third-quarter GDP was reported this morning at 3.5%. This was better than the 3.0% estimate and last quarter’s -.7%. Inflation also came in below expectations and this report has the stock market up sharply. The Dow is up 115 points.

Since I believe that the recession is over and that the recent modest correction in stock prices is only temporary, I took advantage of the current decline to move another 7% of my retirement portfolio into the stock market. I am now 78% in stocks, 5% in bonds, and 17% in short term interest rate accounts.

Last April, when I moved back into stocks, I invested only 45% of my portfolio into equities. All summer, I have been slowly transferring from interest rate funds to stocks whenever the market had a correction. I am now finished with my movement into stocks.

November starts the strongest up-seasonal for stocks and should last until the end of January. August through October is usually the number one seasonal downtrend for stocks but this year the correction came a bit earlier in June. The decline was a modest 8.8%. There has been little or no correction during the August/October eriod. This contrarian price movement has happened only twice before in the last 25 years. In those two years, the market had a strong rally into the end of the year and that’s what I’m looking for this year.

The Co/Lag ratio (my favorite economic indicator) has been predicting a September end to the recession since last May, and this morning’s better than expected GDP number plus the superior earnings quarter we’ve seen for corporations, gives me hope that the rally will continue. That’s why I’ve moved so aggressively towards the stock market.

Normally, the rule of thumb is that your portfolio should be the same percentage in bonds as your age and the rest in the stock market. Since I’m 63, that means I should have 63% of my portfolio in bonds and 37% in stocks. Given that I’m 78% in stocks shows you how aggressive I am currently investing in equities.

Starting in mid-January, I plan on pulling my stock portfolio back to around 40%. I’ll do it in pieces over a month or so on any big rally days, but for now I’m done adjusting and will let this mix ride until after the first of the year.