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

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

06/29/2015

Thrift Savings Plan duckyWelcome back for the June 2015 update. We are so late in the month, I am mostly just going to talk about how the big headlines regarding Greece and the Federal Reserve impact us and our Thrift Savings Plan strategy.

Bottom line up front: my current TSP allocation remains 100% in the TSP S Fund (this reflects both my contribution allocation as well as where my existing balances are invested).

TSP Allocation Guide’s performance year-to-date: 6.91% (through market close on 06/26/2015)

Year to date Thrift Savings Plan fund performance:
• TSP C Fund: 3.13%
• TSP S Fund: 6.91%
• TSP I Fund: 9.77%
• TSP G Fund: 0.93%
• TSP F Fund: -0.58%

And the TSP LifeCycle Funds are very average for 2015 so far (just as they are engineered to be), ranging from 1.76% to 5.11%.

My view of the markets

For all the market’s apparent recent turmoil (at least according to CNBC), each of the indices are still within a percentage point or two of their all-time highs. And they haven’t actually been at all volatile – by one measure the last few months have been the quietest the market has seen since 1993. The US economy has shown every sign of bouncing back from an ugly first quarter, so my sense is that the market will continue to generally trend up (as it does in bull markets and has since 2009).

Greece (Acropolis Now):

TSP grexit

The big excitement in the financial media these days is the possibility of a Greek default on its sovereign debt payments (which is very likely to happen on Tuesday) and the potential for a Greek exit from the Eurozone (which I would put at close to 50/50). I never underestimate politicians’ capacity to do stupid things for bad reasons, but they are taking this one even closer to the brink than usual. Greek banks will be closed for the next six days to stop the run on deposits and capital controls have been implemented to prevent Greeks from moving their money overseas.

To catch up anyone who hasn’t been following, Greece is one of the sick men of Europe (a charter member of the “PIGS” – Portugal, Italy, Greece and Spain), and is in the worst shape of the group. Europe largely tried to fix the 2008 Economic Crisis with austerity, cutting government spending to the bone (always popular politically with the folks who have jobs, but exactly the wrong thing to do from an economic standpoint). Greece didn’t go along, declining to cut pensions, government jobs, and other government spending to the degree that its lenders (mainly composed of European central banks) demanded.

This is nothing new for Greece, which has been in default on its sovereign debt for fully half the years since it became a modern independent state in 1832 and doesn’t show any signs of developing a more business-like attitude towards things like collecting taxes and repaying debts. It has played a continuous game with the EU since joining, promising one thing, doing another, and even submitting false economic data to maintain its position and obtain additional loans.

europe-according-to-greeceI suspect additional bailouts and emergency loans would have kept Greece on its feet again this time, but the ultra-Left won in a landslide in Greek national elections just five months ago and they feel they have a mandate to push back against austerity measures which Europe is trying to force upon them and to restore government jobs and pensions. The Greeks don’t want to leave the Eurozone (in a recent poll seven out of ten Greeks said that they wanted to stay within the Eurozone “at any cost”), but neither do they want to see their retirement age pushed up to 67 or their pensions cut.

On Europe’s side of the argument, they are sick of the games the Greek leadership has been playing and don’t trust them to negotiate in good faith.  I also don’t think you can completely discount as a factor the sense in the heart of Europe that the Greeks aren’t really quite as European as they are, and that the Eurozone would be a bit more, well, European without them.

Greece chartSo what does this mean for the Thrift Savings Plan? Unless your allocation includes the TSP I Fund, not much. A Greek default – and even an exit from the Eurozone – will cause some short term blips in the US stock market which loves any excuse to bounce around, but will have no impact on the TSP S and C funds in the medium and long term. Trade between the US and Greece is almost non-existent and US investors have very little money invested in Greece.

If you are in the TSP I Fund, it is going to be an exciting week. I still think there is a good chance they will kick the can down the road and eventually reach a compromise which keeps Greece in the Eurozone – the two sides really aren’t that far apart. If that happens, the TSP I Fund will see a rally. But if not we could see turmoil in the European market (which comprises a significant portion of the TSP I Fund) for months to come.

The bigger concern is that this could establish a precedent and some of the other PIGS could follow, or even that the UK might decide to spin itself off from Europe. Those events would require a much more complicated unraveling of the European banking system and could lead to a recession in Europe which would certainly impact the global economy and the Thrift Savings Plan’s domestic equity funds.

There are certainly some opportunities for the gamblers out there. I expect all markets will be down at the beginning of this week, so if there is something you have been waiting to buy on the dip outside the Thrift Savings Plan, this might not be a bad time if things really drop. Timing the bottom for Europe is tricky – it is going to be down and at some point the TSP I Fund is going to see a bounce, but whether that comes next week or next year is beyond my ability to predict.

The Fed:

The Federal Reserve held its most recent meeting on June 16-17. As was widely anticipated, the Fed did not raise interest rates, but strongly hinted that a rate hike isn’t far off. The most important takeaway from the meeting was that 15 of the 17 FOMC members said they see a rate increase coming before the end of this year. As we are entering the second half of the year, that means it can’t be too terribly far off.

The Fed has four meetings left this year. The futures market games out the probability of a rate hike at each of those. For the July meeting, there is a 0% chance of a rate hike; for September it rises to 16.8%; for October it rises to 34.4%; and for December, the chances rise to 57.1%. And for what it is worth, the futures market believes there is a 20% chance there could be two rate hikes by December.

I think it is a foregone conclusion that there will be a rate hike sometime late this year unless there is a major change in the economic indicators. So how does that effect our Thrift Savings Plan? The last rate-hike cycle consisted of 17 rates hikes at 17 consecutive meetings. If that happens again we will see a significant impact on the stock market as cheap money dries up for both investors and companies, and bond yields rise and create an alternative to investing in stocks.

YellinI don’t think that is going to happen. I think we will see an interest rate hike at some point in the fall, but it would not surprise me at all to see subsequent hikes spread out over a wider period of time. A hint that this is what the Fed is contemplating came from Janet Yellen in her post-meeting press conference when she said, “Let me emphasize that the importance of the initial increase should not be overstated. The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate in order to support continued progress towards our objectives of maximum employment and 2% inflation.”

That’s why the market rallied after the Fed’s meeting. The market took those comments to mean that inflation-adjusted interest rates will likely remain negative for another year or two. That would be very good news for those invested in the Thrift Savings Plan S and C funds.

Current Economic Numbers:

We are so close to the end of June I’m not going to bother running through each of the indicators. Suffice it to say that all of them were positive for the continuation of the recovery in May and showed a good bounce from the weakness we saw in the first quarter.

Recommended Reading:

essentialismThe most interesting book I read in the last month has very little to do with investing on its surface, but instead is about adopting a more disciplined way of thinking, minimizing distraction, and focusing on the things which are important to you and your goals. I hate self-improvement books with their standard bromides and I cracked this one open with a very cynical predisposition, but was pleasantly surprised. Well worth a read for the price of a trip to Starbucks if it is your sort of thing:

Essentialism: The Disciplined Pursuit of Lessby Greg McKeown.

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 Thrift Savings Plan allocation or something shocking happens which requires me to send out a new 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 have stumbled across for investors, Feds and the military a few times a week at: @TSPallocation

What’s in it for me?

Thrift Savings Plan puppyThe puppy and 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. 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!

 

4 thoughts on “Current Thrift Savings Plan Allocation and Business Cycle Analysis – June 2015”

  1. Hello and thank you for another great update. Your insight and guidance has really helped me maximize my gains and develop a long-term investment strategy.

    Here is my question. How will the impending $72b default by Puerto Rico impact TSP funds, mainly the S and C-Fund? Is this something that investors whould worry about or is there not enough information to make a determination. Any help would be much appreciated. Thanks.

    Mikel

    1. I haven’t spent a lot of time looking at it, but I don’t think a Puerto Rican default would have much of an impact on the Thrift Savings Plan. Some municipal bond funds and hedge funds with high exposure to PR are taking a big hit, but I don’t see it spreading to the rest of the markets.

  2. I have been following your updates for about 6 months. I learned a lot from your website and look forward to the updates as well. I am a 34 year old active duty servicemember and father. Despite your recs to go with S fund this year I have remained 100% in the 2050 lifecycle TSP fund. I have begun buying additional Vanguard stock market index funds this year to give me a little more stock exposure without quite the psychological adjustment I’d need to move my entire retirement savings out of the lifecycle fund.

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