THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.
And now I’m going to tell you that I’m not worried about the stock market. And that is going to make some of you market watchers absolutely crazy. One of the good things about getting old is that I have seen this movie over and over again. And that lets me take a long perspective on short-term market events. I have a lot of money in the stock market – my “losses” so far this year are probably well north of $200,000 (I haven’t bothered figuring out exactly what my paper loss is because it doesn’t matter). I also haven’t lost a minute of sleep, or doubted my investing strategy once. Because the alternative is to try to time the market, which I know I can’t do (and I don’t believe anyone can consistently do), or pull my money out of stocks, which I know will result in lower returns over the long term.
And the long term is what I care about – it doesn’t make a bit of difference to me what the market does this month, because I’m not spending any of the money I have invested in the market this month. I care about what the market does between now and, let’s say 2030, when I hang it all up and go tramping around in the woods with my dogs for a living and need my Thrift Savings Plan to support my lifestyle. And I am convinced that being invested in the stock market all the time, with the exception of when the US is in recession, is the simple way to maximize that nest egg.
The market is off to such a bad start this year because of China and oil. I’m going to save most of my discussion of these two catalysts for my Look Forward at 2016 post (which should be out in the next few days). But here is the nutshell:
(1) China isn’t big enough for its problems to have a significant, long-term impact on the US economy. But it is plenty big enough to cause a lot of short-term volatility.
(2) Low oil prices are good for the US economy long term. But obviously bad for stocks in the oil sector, which make up about 5% of the US stock market overall (about 6.5% of the TSP C Fund and about 3% of the TSP S Fund). And bad for the economies of oil producing countries, which doesn’t by itself impact US share prices, but creates fear of potential financial meltdowns abroad, which causes volatility.
The fact that China and Oil shouldn’t be having such a dramatic impact on the US stock market, definitely doesn’t keep it from happening.
Right now we are at about an 8% decline for the year. So where do we go from here? Anyone who has read me for any length of time has read over and over again that the market will see a 10% decline once per year on average. So maybe this is the decline for 2016. Of course, to reach that average, in some years you have to have more than one such decline to make up for the years in which you had none. The good news is, there have been 27 corrections of 10% or more since 1987, and the market has recovered each and every time.
But what if it keeps declining? What if we go into bear market territory (a 20% decline)? The news here is also fairly reassuring. Absent a recession (which we most assuredly are not in) that only happens once a decade on average, so it isn’t likely now. And even if it does, we come back fairly quickly from those events as well.
Since 1985 the S&P 500 has fallen at least 20% three times during non-recessionary periods. All three times were caused by financial “accidents” – incidents in which a bubble burst or a trading system failed or politicians did something really stupid for political reasons. And in all three cases the recovery was fairly swift. These events were: (1) the Black Monday crash of 1987 (a decline of 33%, back to break-even in 22 months); (2) the 1998 Russian default crisis (a decline of 22%, back to break-even in six weeks); and (3) the 2011 Eurozone crisis, coupled with the political nonsense over raising the federal debt ceiling (a decline of 21%, back to break-even in five months).
Here’s the picture which is worth a thousand words – all those horribly traumatic corrections put into perspective over time. This is why buy and hold works:
Last Month’s Economic Numbers:
So I can get this out tonight, I am going to do the Cliff’s Notes version of 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).
First up, the US numbers:
Employment numbers: the December jobs numbers beat expectations both in jobs created as well as wage growth, with a higher than expected increase of 292,000 jobs. 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 economic growth, and this month’s reading of 48.2 is below that range:
Manufacturing contracted in December as the PMI registered 48.2 percent, a decrease of 0.4 percentage points from the November. 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 43.1 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the December PMI indicates growth for the 79th consecutive month in the overall economy, while indicating contraction in the manufacturing sector for the second time in 36 months.
Yield spreads: Based on yield spreads, the Cleveland Fed places the probability of a US recession based on the yield curve in the next year at 4.42%:
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 November to December. The growth rate is what is meaningful here, and the growth rate did slow a bit last month as you can see in the chart below:
Money Supply M2 in the United States increased to 12330 USD Billion in December from 12288.10 USD Billion in November 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. (For what it’s worth, most economists agree with my assessment that we are in the Mid Phase of the business cycle – one page I keep bookmarked is Fidelity’s Business Cycle Analysis.)
I am a little less confident in the I Fund at the moment. Europe’s recovery is considerably more fragile than that of the US, and Europe is significantly more dependent upon selling goods and services to China than the US. I will definitely be watching the indicators for Japan, the UK, Germany, France and Switzerland closely over the coming months, and may well decide to trim or eliminate my position if China’s stumble is reflected.
- 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 allocations to 45% C Fund, 40% S Fund, and 15% I Fund.
And over the next few months I still plan to complete the transition as follows:
- February: 25% S Fund, 60% C Fund, 15% I Fund
- March: 10% S Fund, 75% C 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. Just food for thought, not something to mirror unless you have done your own research and considered your own circumstances.
This month I am recommending Jack Bogle’s Little Book of Common Sense Investing as a great bit of foundation for any investor. I am a big fan (although not one of those mindless Bogleheads) of Bogle, who is the founder of Vanguard and invented the very first index fund.
The Next Update
Before the end of the month I hope to finish a ‘look forward at 2016’, as well as 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
What’s in it for me?
I don’t ask anything except that you share the site with your colleagues so we can continue to expand the community of feds and service members helping each other in a free, transparent, no-pressure environment (although if you really want to, you can donate to support the site here). You can do that by linking to this site from your own webpage or blog; liking it on Facebook; sharing on Twitter and in other investing forums; or actively participating on our Message Board. So if you found this post useful, please share it with your friends and colleagues using the email and social sharing buttons below right now. Thanks!