THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.
Nothing like a few days with the market in the green to settle nerves and cut down on the number of emails flooding into my inbox. (And apologies to anyone I haven’t responded to in a timely manner – that pesky day job and the family do tend to monopolize my time.)
My sense is that the worst of the correction should be behind us and, absent some new catalyst for traders to get excited about, I generally expect the market to trend upwards.
That upwards trend, if it happens, is almost certainly not going to be smooth, however. Ryan Derrick (@RyanDetrick), sent out an interesting tweet in which he noted that the S&P 500 has been either up or down more than 1% on 63% of trading days so far this year. And that number has only been higher in three previous years: 1931, 1932, and 1933. Are you one of the people who immediately want to know how the market performed those years? So was I. That is well before the advent of the modern stock market, so I expect absolutely zero correlation (and when you see the numbers, you will see that they weren’t even correlated to each other back then), but for what it is worth: 1931 (-43.84%), 1932 (-8.64%), and 1933 (+49.98%). Not for nothing, but this was smack in the middle of the Great Depression, so a little volatility was to be expected.
At any rate, the reason I expect the market to go up over the medium and long term (because I won’t even bother trying to guess what it might do short term) is because (1) the indicators I discuss below still show the US recovery continuing, and (2) because there is nowhere else for people to invest to generate yield – the earnings yield for the S&P 500 (the TSP C Fund) is about 6.3%, the yield for the ten year treasury bond (which is the standard for measuring the bond market) is about 1.76%. If you can do arithmetic, you are putting your money into stocks.
Last Month’s Economic Numbers:
In this section I will 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: the unemployment rate in the United States dropped to 4.9 percent in January, down from 5 percent in the previous month, while total non-farm payroll employment increased by a slightly lower-than-expected 151,000. 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 this month’s reading of 48.2 is below that range, but above the 43.2 which indicates an expansion of the overall economy. At least now we are moving back in the right direction after six straight months of decline:
Manufacturing contracted in January as the PMI registered 48.2 percent, an increase of 0.2 percentage point from the seasonally adjusted December reading of 48 percent, indicating contraction in manufacturing for the fourth consecutive month. 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 January PMI indicates growth for the 80th consecutive month in the overall economy, while indicating contraction in the manufacturing sector. The past relationship between the PMI and the overall economy indicates that the PMI for January (48.2 percent) corresponds to a 1.6 percent increase in real gross domestic product (GDP) on an annualized basis.
And here’s a snapshot of the last 12 months:
Yield spreads: Based on yield spreads, the Cleveland Fed says:
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 January is 6.19 percent, up from December’s 4.42 percent, and from November’s 3.74 percent. So the yield curve is optimistic about the recovery continuing, even if it is somewhat pessimistic as regards 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 December to January. The growth rate is what is meaningful here, and you can see a nice jump in that growth rate in the chart below:
Money Supply M2 in the United States increased to 12418.30 USD Billion in January from 12330 USD Billion in December of 2015.
All of which leads me to believe that we are in the Mid/Growth/Performing stage of the business cycle and so I am continuing the transition of the bulk of my investments from the S Fund to the C Fund (while maintaining my position in the I Fund). I also believe that the probability of the US economy entering a recession in the next year is low.
Don’t forget the TSP I Fund:
With the Risk On/Risk Off trade in full force over the last month, the TSP I Fund basically tracked along with the C Fund and the S Fund. I don’t do a full breakdown in this space, but I watch the indicators for Japan, the UK, Germany, France and Switzerland (which comprise the bulk of the TSP I Fund) in an attempt to divine the direction that index will go over the medium and long term.
- Japan: Japan indicators summary page
- United Kingdom: UK indicators summary page
- France: France indicators summary page
- Switzerland: Switzerland indicators summary page
- Germany: Germany indicators summary page
Continued Transition to the TSP C Fund
I see no reason not to continue moving the bulk of my Thrift Savings Plan investments to the C Fund to reflect where I believe we are in the Business Cycle. As soon as I hit publish on this post, I will be heading to TSP.gov to conduct an inter-fund transfer and to change my allocation to 60% C Fund, 25% S Fund, 15% I Fund.
And over the next few months I still plan to complete the transition as follows:
- March: 75% C Fund, 10% S Fund, 15% I Fund
- April: 85% C Fund, 15% I Fund
I always try to remind readers that this is just what I am doing based on my circumstances, and isn’t a recipe for what anyone else should do with their Thrift Savings Plan. This is just food for thought, not something to mirror unless you have done your own research and considered your own circumstances.
This month’s book is a best seller – The Big Short, by Michael Lewis. (Also a very popular movie, but the book is better). This is the true story of the events leading up to the 2008 financial crisis, and the handful of people who saw it coming and made a fortune. Something like this could be dry, but Lewis is a gifted author and this reads like a very good novel. The Big Short: Inside the Doomsday Machine
The Next Update
Before the end of the month I hope to finally get out a post on my non-TSP investing. 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 have stumbled across for investors, Feds and the military about once a day at: @TSPallocation
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