Current Thrift Savings Plan Allocation and Business Cycle Phase Update – February 2015

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

02/19/2015

snow days TSP allocationWelcome back for 2015’s first review of where we are the business cycle and how that impacts my Thrift Savings Plan allocation. I will also touch on my views of the markets overall and discuss where I am investing outside the TSP.

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:  4.02% (through market close on 02/19/2015)

Year to date Thrift Savings Plan fund performance (for those of you who care about such things):
•    TSP C Fund:  2.21%
•    TSP S Fund:   4.02%
•    TSP I Fund:    5.92%
•    TSP G Fund:  0.26%
•    TSP F Fund:   0.39%

And the TSP LifeCycle Funds are very average for 2015 so far (just as they are engineered to be), ranging from 1.99% to 3.21%.

My view of the markets

smiling golden TSP AllocationThe markets turned positive and we have started hitting new all time highs again as we escaped January and oil prices have largely stabilized. The US economy continues to do well and Europe has taken steps to prop up their own, so my sense is that the market will continue to generally trend up (as it does in bull markets and has since 2009).

The market goes up some days, and it goes down some days. CNBC and the like will tell you with great authority that the moves are due to the Greek elections or an airstrike in some tiny country or some other event, but that’s just because humans want to believe that there is a way to explain everything. The market won’t go up steadily every day, instead it lurches unevenly along that upward path.

January Economic Numbers:

As always, I will run through 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 January 2014 jobs numbers were very strong and continued the longest private sector job growth streak in US history. I obtain this data from the Bureau of Labor Statistics:

Total nonfarm payroll employment rose by 257,000 in January, and the unemployment rate was little changed at 5.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in retail trade, construction, health care, financial activities, and manufacturing.

 

unemployment rate TSP Allocation Guide February 2015

That small uptick in the unemployment rate in January is not an area of concern. That reflects people re-entering the workforce because the economy is improving, and workers who obtained temporary jobs over the holidays and are now looking for work again. The US economy has added 3.2 million jobs over the past year, the recipients of which are now spurring production and consumption which will lead to more hiring.

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 53.5 is within the range of what we are looking for, but it is worth noting it is the lowest number we have seen in more than a year:

Economic activity in the manufacturing sector expanded in January for the 20th consecutive month, and the overall economy grew for the 68th consecutive month. The January PMI® registered 53.5 percent, a decrease of 1.6 percentage points from December’s seasonally adjusted reading of 55.1 percent. Of the 18 manufacturing industries, 14 are reporting growth in January.

 

12 month PMI TSP Talk

Yield spreads: I obtain my data for this section from the Cleveland Federal Reserve. This month the Cleveland Fed noted:

Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate that the expected chance of the economy being in a recession next January at 5.97 percent, up from December’s 3.49 percent and November’s 3.02 percent. So although our approach is somewhat pessimistic with regard to the level of growth over the next year, it is quite optimistic about the recovery continuing.

 

Yield curve TSP Talk

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) continues to expand. Note the improved growth rate in the chart since late summer/early fall. I obtain this data from the Federal Reserve:

Money Supply M2 in the United States increased to 11700.30 USD Billion in January of 2015 from 11625.10 USD Billion in December of 2014.

money supply 022015 TSP TalkConclusion: So again, all of the indicators are pointing in the same direction, and I believe that we remain in the Recovery Phase of the Economic Cycle for all of the reasons which I described in my earlier post on The Business Cycle Theory of Investing, and that the chances of the US economy entering recession anytime soon are very low. For that reason, I remain 100% invested in the TSP S Fund.

The Other Thrift Savings Plan Funds:

My views on the other TSP funds are largely unchanged. Europe has taken off nicely following the announcement of their Quantitative Easing program and has taken the TSP I Fund up with it. I am not in the TSP I Fund yet because the most important thing I can do in the  stock market is to not lose money. The outcome of the current negotiations with Greece could have a dramatic negative effect on the European markets if they do not reach an agreement. I do think they almost certainly will arrive at a compromise, even if it is temporary and they have to go through all of this again in six months or a year. I do plenty of gambling in the stock market, but not with my retirement accounts, so once that is resolved I may well decide to move a small percentage of my Thrift Savings Plan to the TSP I Fund (probably not exceeding 10%).

Investing outside the Thrift Savings Plan:

Disclaimer: This non-TSP talk is for fun, not at all a recommendation to buy. The vast, vast majority of my investments outside the Thrift Savings Plan are in great big index funds, not individual stocks. So this is Vegas money, just for fun. Really.

oil workers thrift savings plan allocation guide

Energy Stocks: I believe oil prices have established a base and there isn’t much downside potential from here. They may well bounce around in the $40s a few more times in the first half of 2015, but six months or a year from now they will be considerably higher. The impression I have is that the institutional investors are no longer worried about buying energy stocks before they fall with the price of oil again, but rather now are worried that they are going to miss out on the recovery if they don’t buy now.

I have written about energy stocks a number of times over the past few months. My favorites remain Chevron (CVX), ConocoPhilips (COP), Magellan Midstream Partners (MMP) and Schlumberger (SLB).

Apple (AAPL): Apple remains my largest individual stock holding, constituting about 10% of my non-TSP investments. That is far in excess of my otherwise inviolate rule of never having an individual stock comprise more than 5% of my portfolio. I fully intend to trim my position in the relatively near future, but it is tough to do when it is going up 5% a week as it has been. There has been too much positive press and general euphoria regarding Apple over the past few months and I believe that it is due for a correction. I tend to believe (or maybe just hope) that no major correction will come for another quarter or two when their record breaking earnings slow along with the end of the iPhone 6 upgrade cycle. Between now and then, however, I anticipate some two additional upward catalysts:

apple watch TSP talk(1) debut of the Apple Watch: I believe the lower end “sports” version of the watch will quickly dominate the fitness wearables category. That will be enough to make it a success and anything beyond that will be gravy. Massive media coverage of lines at retail stores and waiting lists following the launch will generate positive buzz which will move the stock, if only temporarily.

(2) a dividend increase: since Apple started paying dividends in 2012, they have increased their dividend twice – the first time after three quarters, the second after four quarters. It has now been four quarters since the last increase so I think there is a good chance we will see an announcement with the next declaration in April. If the dividend is increased by four or six cents again it won’t cause a big move, but if a more significant increase is announced we should see a bounce.

There are a few other potential catalysts out there: Congress could reach an agreement to allow the repatriation of foreign earnings at a lower tax rate which would allow Apple to bring home the $178 billion it currently holds overseas; Apple could introduce a new product category; or Apple Pay adoption could really accelerate. But the timing on those possibilities cannot be predicted.

Recommended Reading:

I have added another of the all-time classic books on investing to the recommended reading page. I had forgotten about Benjamin Graham’s The Intelligent Investor until I stumbled across a copy on my bookshelf last weekend and didn’t put it down until several hours later. Graham created and taught many of the principles of modern investing, and was Warren Buffett’s mentor

The Next Update

I will send out a new update next month after all the February data comes in unless I decide to make a change in my 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 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. 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!

 

7 thoughts on “Current Thrift Savings Plan Allocation and Business Cycle Phase Update – February 2015”

  1. I liked your statement here: “humans want to believe that there is a way to explain everything”. A friend of mine and I tried day trading years ago before we finally got smart. We would look at stocks with great numbers and be dumbfounded why their stock prices would fall. We came to the conclusion that there was a lot of human emotion involved, especially in the short term. People would panic for no reason and start selling and the price would fall. At the end of the day analysts would have a “reason” for it, but they never bothered to explain why the same stocks would go back up a week later. Madness! Day trading is like playing fantasy baseball, most times the numbers on the back of the card mean nothing in the short term, but are usually reliable over the long term.

    Thank you for your columns, I enjoy reading them.

  2. Just today I went 50/50 S and I Funds moving out of C giving me a little over 10% International exposure for the entire portfolio. Some financial advisors like Ric Edelman (ricedelman.com) recommend to have exposure to the international markets as a part of being properly diversified.

  3. I was looking into starting to invest outside oft he TSP, read a book about investing, (will go ahead and read your recommended book) researched online brokers, but still little hesitant and not sure how and where to start. I would like to do it myself, not having to pay a third party a fee to “run the show”, if possible. I was wondering if you could give me some hints / advice / recommendation to make the first move.
    I appreciate what you are doing for us less “savvy ” yet willing to learn.
    Thank you very much. Kat

    1. I keep meaning to write a post about how to get started for feds who want to invest outside the Thrift Savings Plan, thanks for reminding me. I would almost certainly open a brokerage account at Vanguard. If I remember correctly, you must have a minimum of $3000 to open the account. There are no account maintenance fees if you receive your statements and such electronically. No commissions are charged for trading Vanguard ETFs (which are really about all you need), and only $7 per trade for non-Vanguard ETFs and individual stocks for the first 25 trades each year. Good luck, and take it slow.

  4. Paul – in regards to energy, which ETF would you prefer: Vanguard’ s VDE or iShare’ s XLE? I’m going buy some energy and hold it for a year or so. VDE holds more stocks and I have a Vanguard brokerage account, so it’s free to trade. Any upside to XLE? Any guidance on whether we’re close to oil’ s bottom?

    What are your thoughts on UA? I read it still has a lot of growth potential in Europe.

    Also going to grab some AAPL.

    Thanks for all your help with this site.

    Steve

    1. I really don’t see much difference between the two funds – expenses are about the same and they are even in the same sub-sector (large cap energy core value in Morningstar’s style map). So in your case I’d probably go with the free trades.

      I really don’t have any guess as to whether we are at the bottom or there is worse yet to come. It will be interesting to see what happens this year when summer hits and oil prices usually pop higher.

      I have never really looked at airline stocks. Watching nearly all of them go through bankruptcy over the past few years has soured me on those as long term investments, and it is pretty rare that I look at something for a short term trade anymore.

Leave a Reply