Current Thrift Savings Plan Allocation and Business Cycle Analysis – April 2015

THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.

Thrift Savings Plan squirrel04/18/2015

Welcome back for another quick look at the economy, the stock market, and our Thrift Savings Plan allocation. I will talk below about the things which are creating short-term volatility in the markets (earnings, the Fed, Greece, and China), and the economic indicators which drive our long-term strategy.

I’m running a little late this month because of tax day, but with nothing particularly notable impacting the economy or markets there was no pressure to rush something out.

Bottom Line Up Front

I believe we are still in the recovery phase of the business cycle and so my current Thrift Savings Plan allocation remains 100% in the TSP S Fund (this reflects both my contribution allocation as well as where my existing balances are invested).

Our Global Community

It has been while since I have thanked everyone who has shared the site with their friends and colleagues. We now have feds and military service members from 127 countries on the mailing list. In the time since I started drafting this update the live scan of incoming IP addresses has shown visitors from Zamboanga, Philippines (Camp Navarro, I presume); Kiev, Ukraine (hopefully not hackers); Brasilia, Brazil; and dozens of other exotic places on almost every continent.

Amundsen Scott StationEvery continent except Antarctica, in fact. Which makes me a little sad, because I started talking about wanting a reader in Antarctica two years ago. So if you are a USAP employee reading this at McMurdo, Amundsen-Scott, Byrd, or Palmer, please let me know. And if you have any friends down there, please pass this along to them. Once we get Antarctica I will start badgering our readers at NASA and work to find some Thrift Savings Plan investors on the International Space Station.

I strikes me that it might be entertaining to create a page on the site for photos of some of the more interesting locations our colleagues live and work in. If you have a cool shot of your facility, the view from it, or something else fun to look at, just hit reply to the email update and attach the photo with a caption and I’ll get it online.

Thrift Savings Plan bumpy roadShort-term Drivers of Volatility

The financial media has been having a wonderful time over the past few weeks with the headline-of-the-day to which they attribute market moves which are largely arbitrary. But we are currently in a period of heightened volatility and I believe this will continue over the next few months as we see the divergence between the strategies of the US Federal Reserve and other central banks play out, watch oil prices fluctuate, the strong dollar’s impacts on earnings are realized, and determine whether or not Greece remains in the Eurozone.

Two things to remember when you see the markets bouncing around and the talking heads working themselves into a frenzy:

(1) there is no correlation between volatility and risk when you are a long-term investor;

(2) none of the issues listed above will have an identifiable impact on our long-term returns.

Greece represents a completely insignificant part of the global economy and a very minor portion of the Eurozone. Whether they convince the rest of Europe to restructure their debt and they remain in the Eurozone, or they default and are pushed out will be forgotten a few weeks after it occurs (except in Greece which will undergo a wrenching economic crisis which will last for years if they leave). The markets will bounce as deadlines approach, but it really won’t matter to us either way.

The strong dollar has had a very predictable impact on the earnings of US companies with significant sales overseas. As usual, Wall Street overreacted to the coming change, and as a result 81% of companies which have reported earnings for the first quarter have exceeded analyst expectations (compared to 63% in a typical quarter). This will continue to be a story and an area of concern for the multi-nationals which are losing billions in sales to the strong dollar. It is actually even poised to become worse as the Fed tightens monetary policy (raises interest rates) and the European Central Bank (ECB) loosens (lowers rates through its quantitative easing program). This will slow the US economy over the next few years, but there are no indications to suggest that it will tip us into recession.

Oil prices seem to be stabilizing and even edging up slowly. The lower prices at the gas pump are starting to show up in consumer spending in other areas which is good for the economy. There will be some more swings, but my sense is that the worst of it is over and the markets have largely adjusted to the new prices.

Whether or not the Fed will raise interest rates in June or wait until the Fall remains a favorite topic in the financial media. My sense at this point is that the poorer than expected March jobs report will tip the balance away from a June change and that a rate increase will come in the Fall. But as we discussed last month, the market generally does well in the twelve month period surrounding the beginning of rate increases and the real issue is how often and to what degree they continue to raise rates after that first increase.

Thrift Savings Plan Fund Performance Year to Date

•    TSP C Fund:  1.69%
•    TSP S Fund:   5.55%
•    TSP I Fund:    8.50%
•    TSP F Fund:   2.18%
•    TSP G Fund:   0.55%

I have been in the TSP S Fund for the entire year, so my returns match that fund exactly. I still believe the TSP I Fund is likely to do well under the ECB’s QE program, but haven’t quite pulled the trigger on moving a percentage of my allocation to that fund (I might be inclined to wait for Greece to sort itself out at this point). To me it still seems like a bit of a gamble and I try not to gamble in my Thrift Savings Plan. When/if I do, it will be a relatively low exposure, probably on the order of 10-15%

March Economic Numbers

Things have definitely slowed down, but are continuing to move in the right direction and I’m satisfied that we understand which phase of the business cycle we are in and the risk of recession is extremely low. I am once again going to dispense with most of the charts and discussion about the economic indicator numbers this month and just hit the highlights:

Employment numbers: the March jobs numbers were weaker than expected, but a net increase of 126,000 new jobs keeps us moving in the right direction. The unemployment rate was unchanged at 5.5 percent.

Purchasing Managers’ Index (PMI): as usual, I pulled up the most recent report from the Institute for Supply Management. Any number above 50 indicates economic growth, and this month’s reading of 51.5% is within the range of what we are looking for. But is worth noting this is even lower than last month and is again the lowest number we have seen in more than a year.

Yield spreads: The yield curve turned flatter in March, indicating flatter growth and a slightly higher risk of recession (albeit still less than 5% in the next 12 months). I obtain my data for this section from the Cleveland Federal Reserve.

Money supply growth rate: Money Supply M2 in the United States increased to 11846 USD Billion in March of 2015 from 11826.20 USD Billion in February. The growth rate slowed from the very strong rate we saw in February, but is in line with the average we have seen during this recovery.

Conclusion: So again, all of the indicators are pointing in the same direction, and I believe that we remain in the Recovery Phase of the Business Cycle for all of the reasons which I described in my earlier post on The Business Cycle Theory of Investing, and that the chances of the US economy entering recession anytime soon are very low. For that reason, I remain 100% invested in the TSP S Fund.

Investing Outside the Thrift Savings Plan

My largest individual stock position remains Apple (AAPL). I don’t expect this stock to do anything too dramatic – it isn’t going to double (or go bankrupt) like one of my little biotech gambles – but I do think it will outperform the market over the next year. A number of minor catalysts are possible in the next few months which will likely generate positive news and some growth, including Apple Watch sales (all indications are that sales have exceed projections), the continued spread of Apple Pay, the likely introduction of an Apple TV “skinny bundle” of TV channels which will allow many to cut the cable TV cord, and the introduction of the new MacBook laptop which will be the new standard in the very portable laptop space (it is essentially a retina iPad with a very slim keyboard attached). I keep looking for an exit point to pare my Apple holdings (no pun intended) back to a smaller percentage of my individual holdings, but it hasn’t plateaued.

My charts aren’t working right now, but over the past 10 years, AAPL is up a little over 2,300% compared to the S&P 500’s 74.6%.

The Next Update

I will send out a new update next month after all of this month’s data comes in unless I decide to make a change in my allocation or something shocking happens which requires me to send out an additional email. I send out a notification of these updates (or Thrift Savings Plan 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 have stumbled across for investors, Feds and the military about once a day at: @TSPallocation

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12 thoughts on “Current Thrift Savings Plan Allocation and Business Cycle Analysis – April 2015”

  1. I’m guessing the Antarctica crews have their IP’s routed through some other country. I know when I go to Baghdad the ISP there routes our ISP through somewhere in the States, which is good because we can still watch Netflix.

  2. I have been reading a lot of disappointment with the apple watch, even though its not out yet, the techies are not impressed by the features. However the initial estimated sales numbers for it rock compared to other smart watches. Still, I think Apple will dip a bit before coming back up for the developers conference in June, and hype of the next iPhone season, I expect it to add another $10 per share, into the high $130s.

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