So as I do every quarter, I will give you a quick update on the state of the markets. I haven't often been rendered with little to say but that's how I feel about this market right now. The data that the market is signaling is very mixed and one could say perplexing. If you don't believe me just follow the stock analysts on TV, the administration's economic team, or Ben Bernanke and the Federal Reserve. For each one of these groups, there is sharp disagreement on whether we are headed for a second dip into a recession or showing signs of growth after one of the worst recessions in history. Its gotten so heavily debated the primary topic in all these circles is whether there should be Quantitative Easing (QE) Pt.2 or a second stimulus effort. I won't go into grave detail but QE as it is nicknamed means that the Federal Reserve will take actions that "PUMP" more money into the economy. The likely predicted outcome may be interest rates dropping further which in turn is supposed to jump start demand for refinancing and loans for other activities (but many banks aren't lending). The Federal Reserve takes an action like this if they believe that the US economy is headed back into a recession or simply just growing too slowly to heal properly. This is why you see the administration attempting to pass "stimulus" type bills to help the economy, such as the most recent 'Small Business Tax Credit Bill' that was passed recently.
In short here is my opinion on the state of the markets and how you should arrange your portfolio accordingly.
State of the Markets
1) The Federal Reserve has been revising their growth outlook of the economy and signs are confirming growth, BUT SLUGGISH GROWTH
2) Right now I truly believe we are facing some disinflation or decline in prices. Think, how many people are holding off on purchasing something or getting a loan because they continually believe prices are going to fall. This is deflation and can be a drag to the economy...
3) The likelihood is that the Fed will implement QE Pt2 later this year because of the slow growth and this could lead to a further decline in rates. However, we should be aware that the the long-term outcome of pumping all this money has to be inflation down the line...which lead to the US Dollars value declining.
4) There is growth in the economy, however because it's such a bad situation not many people on main street will notice. Look, the stock market has been climbing higher and September was the best month on record since 1939, (yup since the Great Depression).
How to Arrange Your Investments & 401K Portfolios
1) If the Fed is forecasting slowing growth, we need to get "PAID" until things get better:
- Ensure you have a Dividend Yield Fund selected
2) Deflation can be a drag and inflation eats at your money. To protect against this:
- Select Treasury Inflation Protected Securities aka TIPS (if available to you)
- Select a Commodity Fund to participate in Gold, Oil, Gas, etc
3) QE Pt2 would continue to push rates down and makes bonds look like they have weak rates of returns:
- Re-Balance bond gains made and starting putting them into stock funds (buy on pullbacks)...with a priority to dividend and technology stocks
4) The economy growing so slow means that nobody is unhappy, so that leads to my last tip:
- Re-balance bond gains into international stocks and emerging markets.
Potential Allocation Breakout
60% Stocks - Dividend Fund, Large Cap/Growth Fund, International Fund (Equally)
40% Bonds - Short Term Bonds, Treasury Inflation Protection Securities (Equally)
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