April/May 2018 TSP Allocation Update

04/17/2018

Welcome back for the April/May update.

First up, I want to again thank the folks who donated to support the site since my last update. I have big plans to create a podcast in the near future so readers can listen to new posts on the go, as well as to expand the website later in 2018. Those plans may be a little unrealistic as my friends tell me that things are going to be a bit busy at home with the arrival of the baby. At any rate, the podcast will add a few extra expenses to the site and those donations will definitely help cover those.

Bottom line up front: I will be sticking with an allocation of 50% TSP C Fund and 50% TSP I Fund in both my existing balances and new contributions this month.

Thrift Savings Plan Fund Returns

For all the volatility (and there has been a lot of volatility), the TSP stock funds are all nearly flat for the year overall. Year-to-date returns (through 04/17/2018):

• TSP C Fund:  1.77%
• TSP S Fund:  2.77%
• TSP I Fund:  1.0%
• TSP F Fund:  -1.54%
• TSP G Fund:  0.79%

The Mailbag

Since my  last update, I have received a slew of questions from folks who expect I might be very concerned about talk of trade wars and/or the volatility we have been seeing in the market. Of course those of you who have followed me during volatile times in the past know just how hopelessly boring I am and how little attention I pay to things like that.

Neither side wins in a trade war. As a rule of thumb, the country which is ahead in the trade imbalance typically suffers more. In this instance, China has about a $370 billion edge over the US. But China has a political system and capital reserves which would allow them to suffer for a lot longer than we can. Xi Jinping doesn’t have midterms coming up in the fall and will likely be in power for another 20 years, he can afford to wait out Trump and the Chinese population would accept some economic pain rather than give in and lose their self image as an equal economic power. China has $3 trillion in foreign reserves and can afford to prop up their economy and sectors impacted by a trade conflict as they did during the 2008-09 economic crisis.

Volatility isn’t good or bad – it’s just motion. Some runners have a very smooth, efficient motion. Some swing their arms wildly and bob up and down. If both runners finish the race in the same amount of time, does it matter? And if the stock market finishes the year up 10%, does it make any difference if it was a slow, smooth ascent or a jerky, up-and-down ride? Is there a difference between the results of the blue line and the orange line in this graph?

So where to from here?

All indications are that the US will avoid recession in the next year. The economy isn’t extraordinarily strong, but this slow, steady growth is easier to manage than an overheated, inflationary economy. Short to mid-term, my guess (and it really is a guess) is that the stock market will continue its recent run – earnings for the first quarter are projected to be 17.3% higher than the first quarter of 2017 (and that would be the strongest year-over-year improvement since 2011). Tempering that, first quarter economic growth estimates have been cut in half from about 5% to 2.4%, and stock market valuations are still well above historic averages.

March’s Economic Numbers:

In this section I discuss the key indicator data I use in determining where I think we are in the economic cycle and what that data means to me in deciding how to allocate my Thrift Savings Plan balance. (These indicators are explained in some detail in How to Determine the Current Phase of the Business Cycle.)

Employment numbers:

Total nonfarm payroll employment edged up by 103,000 in March, and the unemployment rate was unchanged at 4.1 percent. Employment increased in manufacturing, health care and mining.

Taking a look at the unemployment rate over the course of the year, you can clearly see that we are at the natural rate of unemployment and further significant improvements in the rate are unlikely. So we focus much more on wage growth at this stage in the business cycle.

In March, average hourly earnings for all employees on private nonfarm payrolls rose by 8 cents to $26.82. Over the year, average hourly earnings have increased by 71 cents, or 2.7 percent. Average hourly earnings for private-sector production and nonsupervisory employees increased by 4 cents to $22.42 in March.

I obtain this data from the Bureau of Labor Statistics.

Purchasing Managers’ Index (PMI):

As usual, I pulled up the most recent report from the Institute for Supply Management. Any number above 50 indicates growth in manufacturing and anything over 43.2 indicates an expansion of the overall economy. The March PMI reading of 59.3 is a very strong number:

Manufacturing expanded in March as the PMI registered 59.3 percent, a decrease of 1.5 percentage points from the February reading of 60.8 percent.

A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI above 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the March PMI indicates growth for the 107th consecutive month in the overall economy and the 19th straight month of growth in the manufacturing sector. The past relationship between the PMI and the overall economy indicates that the PMI for March (59.3 percent) corresponds to a 4.9 percent increase in real gross domestic product (GDP) on an annualized basis.

The last twelve months:

Yield spreads: The yield curve has made a definite move to the upside and gotten steeper in the process. I get this information from the Cleveland Fed, who had this to say:

As we move into spring, short rates have continued to rise, but long rates have not followed along, twisting the yield curve flatter. Using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.5 percent rate over the next year, equal to the February number, and just up from the January prediction of 1.4 percent.

The flatter yield curve had more effect on the estimated probability of recession, which increased a bit. Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate the expected chance of the economy being in a recession next March at 13.4 percent, up from February’s 11.1 percent, as well as January’s 12.9 percent. So the yield curve is optimistic about the recovery continuing, even if it is somewhat pessimistic with regard to the pace of growth over the next year.

Money supply growth rate: Money Supply M2 (which includes savings deposits, money market mutual funds and other time deposits which can be quickly converted into cash or checking deposits) growth improved markedly in March:

Money Supply M2 in the United States increased to 13918.10 USD Billion in March from 13858.30 USD Billion in February of 2018.

Conclusion

All of the above data leads me to believe that we remain in the Mid/Growth/Performing stage of the business cycle (although I do think we are moving later in that stage) and so I am going to continue to allocate my balances and contributions 50% to the C Fund and 50% to the I Fund.

Things I Like

I have lately been trying to make myself more secure online, particularly when I am traveling. A big part of that is using a VPN (virtual private network) on my phone, iPad and laptop whenever I am on any WiFi network besides my home network, and even when I am on cellular systems while traveling overseas.

This allows me to connect to dodgy public/hotel WiFi networks without concern as it automatically encrypts everything I do, the provider can’t even tell what websites and apps I am using, and I can make myself appear to in another country with the click of a button (handy for streaming Netflix or WatchESPN in parts of the world where my account is blocked).

I selected NordVPN based on reviews, speed, price (about 10 cents a day with the two-year plan), and ability to use a single account on six different devices simultaneously (so I can protect all the family’s devices with one account).

I tend to do fairly exhaustive research on things before I buy or sign up, and it seems a shame to not share the results of that research with anyone, so I have created a Things I Like page which you can always find through the Resources tab in the menu. It has absolutely nothing to do with the Thrift Savings Plan, but this is my only website, so there it is.

What I’m Reading

In case you somehow missed it, James Comey’s A Higher Loyalty: Truth, Lies, and Leadership is finally out. This is also completely unrelated to the TSP or investing and isn’t really a recommendation (I just downloaded it today and haven’t even started yet), but it’s the book I will be reading this week.

The Next Update

Quick note: not surprisingly, life is busy with the baby coming, so the next update might be a bit delayed and will almost certainly be a short one. Rest assured that if I see a cause for concern in the May economic numbers, I will get something up and send a notification out to the email list.

I send out a notification of these updates (or allocation changes during the month) to the email list which you can subscribe to here: Subscribe. If you want to see what I am reading throughout the month, I also have a twitter account to which I usually post items of interest which I stumble across for investors, Feds and the military a few times a week at: @TSPallocation

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