Forget the Economic Data: This Recession Is Still On

Battle-weary investors and everyday Americans found something to rejoice about in recent GDP numbers. Initial figures show that our economy expanded at a 3.5% annual rate in the third quarter of 2009, the strongest showing of growth in two years. That's a welcome sign, considering that before this latest quarter, gross domestic product shrunk for four straight quarters, the first time that had happened since the Great Depression. But don't go breaking out the champagne just yet. It would be premature to bid farewell to the effects of this recession.

Elusive gains
Looking at the stock market, it's hard to argue that we're not at the start of another secular bull market. After all, just look at some of the spectacular returns that some big-name S&P 500 stocks have posted so far this year:

Source: Google Finance.

In addition to the stock market's comeback, consumer spending has started to inch its way up, housing appears to have regained some footing, and exports rose at their largest quarterly rate in two years. While the fact that our beleaguered economy started growing again last quarter is heartening, there were some extenuating circumstances -- primarily government stimulus. 

Much of the third quarter's growth was driven by direct and indirect government involvement, through the "Cash for Clunkers" program, home-buying incentives, and other pump-priming activities. While that's good for the economy, much of that effort will result in a one-time shot in the arm. Few are expecting growth in the fourth quarter and early next year to be quite as robust, absent the stimulus.

Odds are good that a few months from now, a handful of smarty-pants economists will look back and declare that the recession ended sometime in mid- to late 2009. But we're not on easy street just yet. The biggest obstacle to a more meaningful recovery is the jobs situation. Unemployment is at a 26-year high, and it's likely to inch up well into 2010. It's true that jobless claims and planned layoffs are falling, but the economy is still hemorrhaging jobs. Additionally, business investment is still negative and continues to detract from overall growth. Until both of these measures turn around, it's still going to feel like we're in a recession, especially for those looking for work.

Slow and steady wins the race
So what's the trick to navigating this tricky not-quite-recession, not-quite-recovery period? First of all, manage your expectations. Understand that, despite the stock market's impressive run-up in the past six months, returns are likely to be somewhat muted in the near future. There could even be a mild or moderate correction in store -- after all, the market has come a long way very quickly. But don't think that's a license to try to time the market, because odds are, you're going to get it wrong. Keeping a long-term focus will help you to ride out any short-term unpleasantness.

Next, don't use the fact that this recession may linger as an excuse to shun stocks. After suffering through a record market drop last year and earlier this year, investors are finally getting back into the market -- but most of them are cozying up to bonds. Inflows into bond funds have reached record highs in recent weeks, while most equity funds are still losing customers. Most investors tend to be reactive thinkers, so it's not entirely surprising that people are craving the relative safety of bonds right now. But it would be a mistake to let up on your equity exposure now. Even though they've been extremely volatile lately, stocks still represent your best chance of building wealth over the long run, so don't count them out!

Lastly, be smart with your stock selection. While pricing pressures are under control right now, inflation is likely to be a problem down the road, thanks to the massive amount of money flooding our financial system. That means you want to own companies that can deal with rising prices and pass those on to consumers. Industry leaders like Philip Morris (NYSE:PM) and Altria Group (NYSE:MO) are in a much better position to handle a spike in inflation than many other consumer-related companies. 

Of course, if you're interested in more investing and financial planning advice for these challenging times, check out the Fool's Rule Your Retirement service. With your free 30-day trial, you'll get the inside scoop on how to retire on time and on track, as well as find out which investments you need to meet your goals. 

Despite the recent positive economic data, we still have some tough times to slog through. But with the right frame of mind and a bit of careful portfolio preparation, we can make it through to the other side relatively unscathed.

Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement newsletter. At the time of publication, she did not own any of the companies mentioned herein. Click here to find out more about the Fool's disclosure policy.