Current Thrift Savings Plan Allocation and Business Cycle Analysis – July 2016



Brexit and the TSP

Brexit and the TSP

So there you have it – the Brits voted to leave the EU, we had a rather predictable short-term panic sell off, and then the market came roaring back with the strongest run we have seen in recent memory (in the last 14 trading days the market has closed higher 12 times). All capped off by the S&P 500 hitting an all time record, and then breaking that record several more times.

Breaking that down a little bit more, in the two trading days following the Brexit vote the TSP C Fund declined 5.34% and the TSP I Fund declined 10.6%. But in the three weeks from the market’s low close on June 27 to today, the C Fund is up 8.19% and the I Fund is up 8.58%

That all makes me look awfully prescient – in last month’s update I said that if they voted to leave we would likely see a short-term sell off, with the I Fund down by at least 10%, followed by a relief rally. Please don’t be fooled, however, as that’s a pretty lucky call to which I would attribute 10% experience in watching the market for a couple of decades now, and 90% pure dumb luck. Because at the end of the day, “nobody knows nothing” short term.

In case you missed last month’s discussion about the Brexit and how I believe it impacts TSP investing, you can find that here:…alysis-june-2016/

Halfway through 2016

We have reached the midpoint of 2016, so let’s take a look at the TSP fund returns year to date (through 07/18/2016):

• TSP C Fund:  7.33%
• TSP S Fund:  6.89%
• TSP I Fund:  -0.74%
• TSP G Fund:  1.01%
• TSP F Fund:   5.57%

What comes next?

The US Markets

I think we will see relatively steady economic growth for the rest of the year, and both oil prices and the US dollar will stabilize and normalize to some extent, which will reduce the drag those factors have had on corporate earnings. Interest rates will remain low – I would not be surprised to see the Fed raise rates once in the Fall (but no more than that) – which provides support for higher stock valuations because bonds will be relatively unattractive compared to stocks. I frankly don’t see a domestic risk to the US economy over the remainder of the year. Key global risks which could certainly impact the US economy include the debt crisis which will hit China at some point in the coming years and additional threats to the cohesiveness of the European single market.

I expect the current stock market run to flatten out and for us to see a correction in the 5% range in the next month or two. (Long time readers will remember we see a 5% correction on average every 2.5 months, so I will almost always be correct when I make this prediction.) At this stage in the business cycle we typically see mid-single digit annual returns in the S&P 500 (the TSP C Fund), so it would be somewhat surprising to see the second half of the year repeat the relative strength of the first half and a total return of much over 10%. I think the C Fund remains the right place to be, and if I was guessing (and that’s all we can do when we try to predict the market over such a short period of time), my hunch is that we will see a total return for the year in the high single digits.

There is a lot of talk in the financial media about the stock market being “over valued” these days. It is a bit more complicated than comparing the S&P’s current price/earnings ratio (P/E) (which is around 23) to the historical median (which is 16.9 over the past 50 years). Certainly by that measure the market is overpriced, but this is a very different market than the historical norms we are comparing it to.

Another number to look at is the ratio of the S&P 500’s P/E ratio to treasury bill yields, by which measure stocks appear significantly undervalued. That ratio typically stays within a very tight range. The median ratio from 1968 to the present is 0.61, with anything over 0.7  historically predicting a double digit annual gain. Right now the ratio is ten times that, at about 7.5.

The predictions made by of those ratios will be bandied about by their proponents as inviolable laws of finance. The truth, I’m sure, is somewhere in between. And as much as we like to find patterns in the past, the market is made up of a huge number of factors and is constantly evolving.

International Markets

brexitingBrexit is important to me because UK companies represent about 20% of the TSP I Fund and there is an excellent chance that the UK will tip into at least a brief recession over the next few quarters. Exports from the UK to the EU account for 47% of the country’s total exports, while 55% of UK imports are coming from the EU. The UK’s dependence on trade with Europe makes the terms of their exit extremely important to the UK economy going forward. The exit vote has not only created near-term market uncertainty, but has raised genuine fears about the future of the EU. This increased uncertainty and higher than anticipated currency volatility make investments in the developed international markets less attractive over the rest of the year for me.

The uncertainty is a big deal for the UK, Europe and probably the I Fund, but I don’t see a significant threat to the global economy and impact on the US recovery. The UK has the fifth largest economy in the world, but its gross domestic product (GDP) as a share of the world total is only 3.7%. And the UK’s trade share in the global total is relatively minuscule, accounting for 2.8% in world exports and about 4% in global imports.

This Month’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 getting late and if I don’t get this out tonight, it probably won’t happen before next weekend so I am going to dispense with all the fancy charts and analysis and give the cliff notes version this month.

Employment numbers: the numbers blew out estimates by about 120,000 jobs with approximately 280,000 jobs created. That should largely ease concerns about last month’s very poor number.

Purchasing Managers’ Index (PMI): the PMI was very strong, coming in at 53.2.

Yield spreads: the yield curve stayed roughly the same last month.

Money supply growth rate: Money Supply M2 continued to grow at a solid rate.


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 have been looking for an exit point for my investment in the TSP I Fund. The I Fund outperformed the C Fund during the bounce back after Brexit, but I don’t have a basis for confidence in that index moving forward and will go to an allocation of 100% C Fund at some point in the near future, perhaps as early as this week. There is no science to when I am going to make that move (and I should probably do it tonight just to spare myself the trouble of sending out another update), but I will give it another day or two to see how it appears to be trending.

Recommended Reading for TSP Investors
This month’s recommended book is The Bogleheads’ Guide to Investing. I sort of hesitated to recommend this book because the Bogleheads can be a bit extreme, bordering on cultish, but there is a tremendous amount of value in this book for any investor. I would just caution that this is based on the investing wisdom of John Bogle who is absolutely world class, but has an understandable bias towards buying and holding mutual funds and ETFs – understandable because that is exactly what John Bogle was selling as the founder and CEO of Vanguard. Absolutely great stuff and great advice for the man on the street who doesn’t have the time or inclination to do anything other than passively participate in the market.

My past recommendations are all compiled on this page if you want to browse other topics and titles:

The Next Update

I expect that I will be sending out an update before next month when I perform an interfund transfer and change my allocation to 100% C Fund. 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?

TSP adviceI 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!

19 thoughts on “Current Thrift Savings Plan Allocation and Business Cycle Analysis – July 2016”

  1. I am expecting a significant pull back to the market in the near future due to its current general overvaluation, especially in the S&P. In hoping to keep my recent gains, I have temporarily moved everything to the G Fund. I realize that calling a top or bottom is not realistic but it would seem that a pull back is quite likely. Thanks for all your hard work.

  2. Thank you for your insight. I always enjoy your take on things and for the past 2 years that I have read your Guide, you have been spot on. I have also been spreading the word and forwarding the Guide to my coworkers. Great Job!!

  3. This morning, right after I completed my own re-allocation to lock-in moderate gains and get out of the I-Fund, your email hit my inbox.

    I have always managed my TSP carefully. Now that I’m retired it is a lot trickier. Your blog keeps me focused and thinking. Thanks.

    1. Ha. I steer well clear of politics in this space. Historically, the economy and stock market have performed better with a Democrat in the White House, and best of all with a Democrat as president and a split congress. The sample size, however, is really too small to reach a conclusive result in my opinion.

  4. Thanks for doing this and posting these great insights.

    I currently have 6 years in the federal system and contributing to the TSP. In your opinion, are your investment decisions the best for anyone, or people at a certain point in their careers. Several other agents I work worth have opted to put their money into Lifecycle funds. I’m curious if you have suggestions on investment strategies for someone with ~15 years left versus someone in their last few years before retirement. Thanks again for your time!

    1. Take a look the historical rates of return for the various funds and contribute the maximum that you afford can into the TSP. I have not been impressed with the L funds since they came into existence. Educate yourself on the basics of investing and I believe you can do better between the C,S,I,F and G funds. You have a long time-horizon and need to take advantage of that and not be overly conservative. You will be amazed at how much your money will grow. Last piece of advice, keep your debt to a minimum. I am a retired agent and have been where you are.

      1. Thanks for the comment, Richard. I appreciate the insight and suggestions. I am trying to be aggressive right now because of how long I have until I retire. I want to be smart though with my aggression. I read up and follow what I can on investment strategies with the TSP, however the issue I often run into is whether those strategies are more geared towards people further into their career or geared towards younger people. I am trying to find a good strategy to follow that is geared towards agents with around 15 years left until retirement that is more aggressive in nature.

        Paul, are you able to also comment on this at all?

  5. Hi Paul. Thanks
    For everything. Quick question, when you say you are going all in the c fund, you are contributing future allocations to the c fund and moving all other funds you already have to the c fund? Thanks in advance

        1. Because we are always expecting a correction in the near future. There just isn’t any way of knowing exactly when it will come so I am better off staying invested. I wrote extensively on that in one of the updates, I will see it I can dig that up and repost it.

  6. Hello Paul, unfortunately I am one of those agents you talked about who invested and forgot about my investment my whole career. As a result, lost $300,000 in the stock market crash of 2008. Thankfully I was able to “recover”but I am retiring in January and find myself risk-shy since that happened. When I reached my retirement goal of 1 million dollars at the beginning of this year, I transferred 90% of my money in the G fund, and only kept 5% in C and S each. Now I find that I’m losing out big-time on the recent earnings and regret it. I want to re-allocate some funds back to the C but my colleagues say i should wait because market is too high to to trade in my G stock for C. Does that make sense or should I go ahead, and what percentage would you recommend.?

    1. I cover that question pretty well in the FAQs at:

      I talk tough, but I have to admit that I have a decent amount of cash from mid-year dividends and such on hand which I am hesitant to dump into the market with it hitting all-time highs. I rationalize that it is okay to wait for a pullback because it is such a small amount that I can consider it part of my “speculative money”, but that’s really a cop out.

  7. When you mention selling the I Fund due to Brexit and EU uncertainty, I can’t help but think that this is a mistake. In this situation, the quote: “Don’t just do something, stand there” comes to mind. I think that the any actual reduction in future economic activity for the EU and EAFE Index economies due to the Brexit vote and EU exit negotiations has already been discounted into the current price of the I Fund, and then some. The EAFE Dev. Index has been trailing the US Indexes lately, but by switching from I to C you are effectively selling the I Fund low in order to buy the C Fund at record highs. The fact that you may have missed out on potential gains had you had that 15% in the C Fund, or endured, are sunk costs at this point and have no bearing on the future.

    Although I think the UK would likely have been better off in the EU, the question from our standpoint as investors is really whether the EAFE Index will outperform the US index over our holding period. I think the answer to this question is “possibly” to “probably” depending on the holding period, and therefore maintaining diversification in the I Fund is justified. I concur with you that the US is probably somewhere in the mid point of a long business cycle (we’ll know for sure in about 10 years), and that the Brexit vote and EU situation is likely to have only a slight effect on US economic activity. However, I think the Brexit vote is actually a good catalyst for needed change in the EU right now. From what I have read the UK was suffering under burdensome economic regulation promulgated in the EU which does not apply well in the UK. The UK was never fully integrated into the EU economy because they did not share the common currency and therefore the ECB did not really control the monetary policy of the UK. The UK will get out, and since the UK and EU are de facto bing trading partners I think they will necessarily work out a decent trade deal. Further, with the exit of the UK the balance of power will necessarily shift in the EU. I expect that France and Germany are fully committed to the success of the EU and will have accept some reforms the the EU going forward that will make the EU more dynamic for future debt and political crises. I also think that at some point the world economy will turn the corner, and there is more “recovery” to be had in the rest of the world once the stimulus provided by the banks of the rest of the world starts kicking in.

    It’s at times like these that it is important to go back to first principles. When we invest in equities we buy an actual share of an actual business that entitles us to an actual share of future earrings of that business for as long as we hang on to those shares of stock in that business. The MSCI indicates in their most recent “fact sheet” that the top 10 companies on the Index are Nestle, Novartis, Roche, Toyota, HSCB, BAT, Shell, BP, Total, and Anheuser. These are huge multinational companies just like most of the top companies on the S&P. Do you really think these companies are no longer worth owning when they have a trailing PE for the index of 17.53 and a FW PE of 13.94 and a div. yield of 3.49, as compared to an S&P trailing PE of 24.85, a FW PE of 18.37 and a div. yield of 2.13, simply due the the Brexit and EU exit negotiations? I think they are worth it, and as said earlier will “possibly” or “probably” outperform the US index over a moderate holding period, because of depressed valuations and improving business conditions around the world. I’m holding onto my allocation of the I Fund and maintaining my contribution allocation. And, with any luck I’ll be buying extra shares of the I Fund each biweek at great prices.

    Great Blog, BTW.

    Keep up the good work!

    1. Thanks for the great analysis and writeup – you have the makings of a blog of your own here. I don’t disagree with anything you say above, but I do tend to stick closely to the Business Cycle strategy within my TSP. My belief is that the UK is going to experience a recession, and with UK stocks comprising 1/5th of the TSP I Fund that means that I am going to get out. It is entirely possible that the UK will somehow avoid that, or the other 4/5ths of the I Fund will do so well that it won’t matter, but I don’t have any reason to believe the C Fund won’t perform reasonably well over the next year so I won’t take a chance in my TSP (I’ve got plenty of risky holdings in other accounts).

      I didn’t exit the I Fund immediately because I thought it was oversold following the vote. I think it has pretty much seen all the short term bounce that it is going to get, so I suspect I will reallocate this week. Even once I’m out of the I Fund, I will certainly be rooting for the UK and Europe to do well as that is an important market for US and emerging market companies which I still hold in abundance.

      Thanks for the great post. Please keep coming back and sharing your thoughts in the comments or (even better) on the message board.

  8. Hi quick question, what is your rate of return year to date? I am just curious to see how well you have done? Thanks and when do you think your next move is? I have interfund transfers that I need to move and was waiting to see what you say because you gave the latest allocation a month ago, unless you are going to stay the same. Thanks so much. So much great info.

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