THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.
Since my last post, the market has continued to trickle up, quietly setting new all-time highs on each of the major indices in the process. All three of them (the S&P 500, DOW and NASDAQ) actually hit all-time highs on the same day a few weeks ago for the first time since the last trading day of 1999.
I’ll bet the obnoxious “sell in May” advocates in your office are keeping very quiet this year. Feel free to rub the recent financial headlines in their faces, and if they protest that this year is an aberration, point them towards this post.
More notable than the recent highs has been the lack of volatility. Typically, if the market is going to make a sharp move, that move is going to be downwards. But in the last 42 trading days the S&P 500 hasn’t declined by more that 0.7% a single time.
Sentiment is poor, we are suffering through a ridiculous election season, Brexit happened, Zika is looming, there is a terror attack somewhere in the world nearly every day – why does the market keep going up? Because behind all of that there has been a steady stream of solid economic news both here in the US and globally, and, more importantly, because there is no alternative to the stock market.
TINA (there is no alternative) means that with interest rates held near zero, there is nowhere else to go for return on your savings. You can’t put it in a bank account, money market account or a bond fund, because you don’t get anything back. This is worst period imaginable for the folks out there who see the stock market as a gamble and never learned to invest, or the folks who got scared away from it for life after seeing some paper losses during one crash or another. They are going to be left behind. But for the rest of us, every pay period some sizeable chunk of our paycheck goes into our retirement accounts and has to go somewhere. And the same thing is happening in tens of millions of other households in the US. And in a few hundred million households around the world. And companies are paying dividends and governments are printing money. And all of that has to go somewhere, and there is no alternative, so that money keeps pumping into the stock market.
Some pundits will tell you that if we are at new highs, surely that means the market has to correct or we are due for a downturn. A correction is always a possibility (and over a long enough period, a certainty). I’m sure we will see one or more in the next few months, but good luck predicting when. I’m pretty sure Peter Lynch was right when he said “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has ever been lost in corrections themselves.”
The other argument you hear a lot is that the stock market is overvalued, meaning that the price to earnings ratio (P/E) is considerably higher than its historic average. P/E is one of the very basic measures for a stock or a group of stocks (an index), and just reflects how much investors are willing to pay for $1 of earnings per share by a company (or the average of all the companies if the P/E is for an index). So if IBM is trading for $100 a share, and it earned $10 a share over the last year, IBM has a P/E of 10. Simple right?
Right now the P/E ratio for the TSP C Fund is almost 25. Which means that on average, investors are willing to pay $25 for every $1 of earnings per share for all of the companies in the S&P 500. That is significantly more than the historical average, which is around 16, which is why some of the talking heads on TV are announcing that we are in a bubble. Over time the expectation is that either earnings have to rise or share prices have to fall to bring our number back towards the average.
But as usual, it’s not that simple. There are a lot of different ways to measure the valuation of the market. Many people believe it is better to look at ten years of trailing earnings (the Shiller P/E) instead of one. The Shiller P/E is currently at 27. And I generally believe that any averages before the advent of the modern stock market are fairly worthless. When you look at it in that context, the Shiller P/E’s average since 1987 of 24 is not significantly below where we are now.
And of course there are lots of other numbers out there which we can slice and study as we try to figure the market out. Last month we talked about the ratio of the S&P 500’s P/E ratio to treasury bill yields, by which measure stocks appear significantly undervalued.
Stock market valuations are too short term to be a factor in my TSP investing decisions, so I write about these issues here just to try to explain some of what you may be hearing or reading, not because I think we should worrying about them.
TSP Fund Returns
The TSP funds all had a good July:
- TSP C Fund: 3.69%
- TSP S Fund: 5.40%
- TSP I Fund: 5.07%
- TSP F Fund: 0.64%
- TSP G Fund: 0.13%
And this is shaping up to be a pretty good year to date (through 08/26/2016):
- TSP C Fund: 7.71%
- TSP S Fund: 8.80%
- TSP I Fund: 1.72%
- TSP F Fund: 5.71%
- TSP G Fund: 1.17%
July’s Economic Numbers:
In this section I typically 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.)
It is already the end of August, so these July numbers are dated and I’m just going to give the cliff notes version again this month:
Employment numbers: the numbers again blew out estimates with approximately 255,000 jobs created. That number may be setting us up for an interest rate hike from the Federal Reserve before the end of the year.
Purchasing Managers’ Index (PMI): the PMI was down slightly from last month, but was a very solid 52.6 (which is well above the range where we start to get concerned).
Yield spreads: the yield curve flattened slightly in July, but according to the Chicago Fed’s model the chances of a recession in the next year based on the curve is still only about 11%.
Money supply growth rate: Money Supply M2 growth rate increased again last month. Very solid number.
All of which leads me to believe that we remain in the Mid/Growth/Performing stage of the business cycle and so I am maintaining the bulk of my investments in the TSP C Fund.
I might as well repeat exactly what I said last month about my 15% allocation to the I Fund. I have been looking for an exit point, but since the Brexit vote the I Fund is up 11.44% compared to the C Fund’s 8.83%, so despite my misgivings about the I Fund going forward, I haven’t been in a hurry to sell. It is dumb for me to try to guess what the market is going to do short term and goes against the long term investing strategies I advocate. I will try to really dive into the I Fund’s component bits in next month’s update.
Military TSP Investors
An increasing percentage of new subscribers to this blog are signing up with military email addresses. That is great for any number of reasons, not least of which is I grew up in a military family and was in uniform myself for a few years. I hope that this site will be a useful resource for many of them, particularly because many military investors are younger, have little or no investing experience, and many come from backgrounds where investing was not a subject of daily conversation (as is true of most of the US population). All of those factors leave them very vulnerable to bad advice and unscrupulous actors.
My father retired from a 28-year military career with well over a million dollars in investments, and that was back when a million dollars was still a lot of money so I’m sure his nest egg was at least double that in today’s dollars. So signing up for a military career doesn’t mean taking a vow of poverty. It certainly helped that my mother also started working once the kids were out of elementary school, which was a bit unusual in the military during that period. They did it by making saving and investing a priority and making smart, long term investing decisions. They were reasonably practical, but certainly not cheap, and they amassed that nest egg while still managing to pay for new cars, boats, family vacations and college educations for a couple of lousy kids. So it can be done, and there are much better tools and opportunities available to military investors today than there were when they were doing it.
I have been intending to increase my outreach to the military community as we get closer to the January 1, 2018 date when the new blended military retirement scheme kicks in and troops gets the option of a 5% match and the 1% automatic contribution in their Thrift Savings Plans. It is estimated that change will bring about 750,000 new military TSP accounts online. So to get that started, I have two requests of you:
- Please share this blog with your friends and colleagues in uniform. I estimate that roughly half of my new subscribers come from Google searches and the other half from word of mouth. You can be that mouth.
- If you have a favorite source of information which provides information for the military on benefits and retirement, please point me towards it. I would love to start forming relationships with some other people who write for a military audience the way I have on the civilian government side of the house. (And so much the better if you are such a resource, or if you know someone in that position who you can introduce me to virtually).
There are very few differences between the military Thrift Savings Plan and the one enjoyed by the rest of us (mostly centered around special tax benefits available to those serving in combat zones). By the end of the year I hope to get a page up on this site which breaks out the special considerations military TSP investors should be aware of.
Recommended Reading for TSP Investors
I didn’t actually read any books on investing since the last update, so nothing new to recommend today. My favorite past recommendations are all compiled on this page if you are looking for something to read:
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 have stumbled across for investors, Feds and the military a few times a week 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 want to, you can donate to support the site here). You can help by telling the person sitting next to you, 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!