August 2017 TSP Allocation Analysis

08/06/2017

cyborgs don't take vacationsWelcome back! The political scene has cooled down a little bit in the last week or two as the White House and Congress have headed out of town for their August vacations, so this month I will get back to talking about the economy and stock market. Unless I go off on a tangent, this update should turn into something of a mid-year review.

First up though, I want to again thank the folks who donated to support the site since my last update. Some of you have been ridiculously generous, and it has been genuinely heartwarming.

Bottom line up front: I will be sticking with an allocation of 100% TSP C Fund in both my existing balances and new contributions this month (and probably for the foreseeable future).

Thrift Savings Plan Fund Returns

The stock market continued to trend up nicely in July:

  • TSP C Fund:  2.05%
  • TSP S Fund:  1.11%
  • TSP I Fund:  2.88%
  • TSP F Fund:  0.43%
  • TSP G Fund:  0.19%

And the TSP Funds year-to-date (through 08/04/2017):

  • TSP C Fund:  11.93%
  • TSP S Fund:  8.18%
  • TSP I Fund:  18.09%
  • TSP F Fund:  3.10%
  • TSP G Fund:  1.38%

The Mid-Year Report

Just a reminder that I am a long-term investor and employ a long-term strategy. Anything can happen in the stock market in the next couple of months, and I don’t have any ability to predict that. What I can do is look at economic data and explain what the market would do if it was completely rational. It is not, of course, it swings wildly from overvalued to undervalued relative to economic output, but it always comes back to where it is supposed to be on average over time.

The economists I follow believe the US will see about 2.5% growth in the US for 2017. Inflation will almost certainly remain low. Job gains appear likely to continue to be steady but unspectacular, and wage growth will be the most important factor to watch in the employment arena. I think the Fed will move very slowly, raising interest rates at most once more this year, although they might well decide to wait until next year. They will start allowing their massive bond holdings to expire at maturity and not reinvest the money, and they won’t want to risk a shock by raising rates at the same time.

That level of growth and employment is textbook mid-stage of the business cycle — a stage during which the TSP C Fund has historically performed the best.

Turning to the global economy (and the TSP I Fund), Europe is doing well, although not growing as quickly as the US. The estimate there is about 1.7% growth for 2017. And Japan is growing a little bit more quickly than expected, and should grow about 1% for the year. That is good news even though I am 100% in US stocks in my Thrift Savings Plan, because that global stability bodes well for preventing meltdowns overseas which can impact the the US market.

So where are the risks? We talked more than enough about Russian interference and the collusion investigation in last month’s update. There is a lot of talk about geopolitical risks, but absent a war on the Korean peninsula, I don’t see anything else on the horizon likely enough to warrant concern. So my biggest concern is still the same as it was in my Look Forward at TSP Investing in 2017 post:  China’s debt bubble. If that pops, all the gains we have seen so far this year will be gone in a few trading sessions (and likely a lot more).

So where to from here? I’m up 12% for the year and I would be delighted with that return if it ended tomorrow. The five remaining months of 2017 is “the short term”, so I hate to make any sort of prediction as to how the market will perform. But there is no reason the market can’t keep going up (and no good reason for the market to go down) during that period. The TSP C Fund is based on stock prices, stock prices are based on earnings, and earning should continue to grow under current economic conditions.

Politics and the Thrift Savings Plan

But what of the huge changes coming to healthcare and taxes and infrastructure? Aren’t those going to give a big boost to the stock market?

Just a reminder that anytime I mention politics in this blog it is not to favor one party or the other, but rather just to explain how the news (and fake news) from DC impacts my investments. Please don’t take anything I write as a personal attack or an attack on your team, it is most assuredly not intended that way.

political gridlock and the TSPThe market has continued higher despite the failure of the Republicans to take advantage of holding the presidency, Senate and House to push through the agenda they campaigned on. And at this point, that inability to make major policy changes is probably considered a good thing by many investors who crave stability above all else.

The healthcare, tax and infrastructure reforms which were supposed to be completed before the August recess appear to be all but dead at this point. When Congress returns, the priorities will be the debt limit, continuing resolutions to keep the government open into the new fiscal year, and eventually some sort of budget. Anything which doesn’t get done this fall, probably isn’t going to get done because when we usher in the New Year, we will also start counting down to the 2018 mid-term elections and it will be even harder to push through major policy changes.

July’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:

In my last update I expressed some concern over a few months of lower than expected job numbers. Things seem to be back on the right track now (perhaps bolstered by the surge in hiring of prosecutors and defense attorneys in the DC area).

Total nonfarm payroll employment increased by 209,000 in July, and the unemployment rate was little changed at 4.3 percent. That beat estimates of approximately 185,000 new jobs created. The change in total nonfarm payroll employment for May was also revised down from 152,000 to 145,000, and the change for June was revised up from 222,000 to 231,000.

Average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents to $26.36. Over the year, average hourly earnings have risen by 65 cents, or 2.5 percent.

If you are trying to sort out whether claims of a huge increase in jobs is true or not, the first six months of 2017 (184,000 jobs created per month) are slightly behind the results in the first six months of 2016 (187,000 jobs created per month), and both of those are right in the range we have been seeing for six years now. A decline in growth makes sense as the economy is at full employment, so changes are typically more apparent in wages than jobs created at this stage. Here’s what it looks like over time:

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 July PMI reading of 56.3 is a strong number:

Manufacturing expanded in July as the PMI registered 56.3 percent, a decrease of 1.5 percentage points from the June reading of 57.8 percent. This indicates growth in manufacturing for the 11th consecutive month and is the fourth highest reading in the last 12 months. 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 43.3 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the June PMI indicates growth for the 98th consecutive month in the overall economy and the 11th straight month of growth in the manufacturing sector

The past relationship between the PMI and the overall economy indicates that the average PMI for January through July (56.4 percent) corresponds to a 4.1 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for July (56.3 percent) is annualized, it corresponds to a 4.1 percent increase in real GDP annually.

The last twelve months:

 

Yield spreads: The yield curve has made a parallel shift upward, with both short and long rates increasing. I get this information from the Cleveland Fed, who had this to say:

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 July at 12.9 percent, a barely noticeable increase from June’s 12.8 percent (just above a one-eighth chance) and up a bit from May’s 10.4 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) increased from May to June.

Money Supply M2 in the United States increased to 13519.30 USD Billion in June from 13495.50 USD Billion in May of 2017.

The growth rate is what is meaningful here, and you can see that it is growth has flattened out to some degree in the chart below:

Conclusion

All of the above data leads me to believe that we remain in the Mid/Growth/Performing stage of the business cycle and so I am going to continue to allocate all of my balances and contributions to the TSP C Fund.

Recommended Reading

I downloaded The Best Investment Writing: Selected writing from leading investors and authors: 1 this week, and it is a very good read. Meb Faber has put out an annual list of the best articles on investing for several years now, and he is publishing it in book form this year. It is a compilation of the best pieces from a huge collection of the big name money managers and stock market researchers today. They have agreed to have their work published in this book because all proceeds are going to the charities of their choice. Lots of great content broken up into ten minute chunks.

The Next Update

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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5 thoughts on “August 2017 TSP Allocation Analysis”

  1. First, I would like to say thanks for your hard work and dedication that you have put in to this site. There just isn’t a lot of info out there for those of us who want to learn, but don’t know where to begin. This definitely helps in providing info into what to look for.

    My question to you though is how do know what “good” performance is with your (my) investment strategy. There’s a dialogue box on my account page that says over the past 12 months….my “PIP” is at 13.2%. Is that “good” and should I be striving for a higher return given the current business cycle? I know that “good” is also relative to the market, but would you say that my performance is effective or on par based on the market we’ve had.

  2. J,

    13.2% is excellent. Goal is to beat inflation and standard safe investing vehicles (bonds, CDs). With standard savings account giving you a rate of return under 1% and The TSP F Fund is at 3.10% and TSP G Fund at 1.38%. I would be happy to have a PIP (represents your own investments) at 13.2%. I once heard some one say, one should try to achieve at least 7%, but strive for 12%. Your doing well today, but that could all change. Watch the cycle and consider Paul’s advice.

    1. Thanks SCJ for your response. I recently discovered this page and will start considering his strategies before I make decisions. I think because I haven’t been scared to be 50/50 in C/S funds over the last year (now 100% C). I accidentally got lucky. I certainly had no idea about investing based on the cycle which will now guide me better when the market isn’t so good as it’s been.

  3. Good morning TS. I haven’t heard anything from you on your website since the beginning of August. I hope that you and your family are doing OK.

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