Current TSP Allocation and Business Cycle Phase Update – April 2014

This is an archive post. Click here to view the Current Update.


Gordon_Gekko Welcome back. Below I will address the recent volatility in the markets, run through the issues dominating the news, give you my views of the March economic numbers, and update my non-TSP investment thoughts.

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).

I hate to sound like a broken record every time the market has a down week, but the stock market will suffer an average of five corrections per year – most of them in the 5% range and with one usually one in the 10% range. Which means a correction is going to happen every couple of months. Nobody can successfully predict exactly when those are going to happen, so if you are going to participate in market gains, you have to participate in market losses. Period.

But even though these corrections happen very routinely, the media, the guys at the water cooler, and some newsletter writers announce that the sky is falling, the bull market is over, and it is time to prepare for the apocalypse every time the market drops more than a few percentage points. For me, when they tell you to get out is always the surest sign that the market will be back into the green the next day. That happened again this time. And it always works that way unless there is a major catalyst, which I’m not seeing right now.

If you sold at the beginning of this week, you bought some jerk on Wall Street a really nice new watch (or a new car depending on your TSP balance). They were buying when you were selling, and you took the loss and they took the gains when the market came back up over the past three days. The actual value of the companies represented by the US stock market didn’t really change by a half trillion dollars over the course of a few hours on Tuesday, but Wall Street made it move that much and they got the lion’s share of the profits which were made that day after the retail investors panicked.

The End is NearHave you noticed yet that the folks who keep telling you to get out of the stock market never tell you that when the market is up? It is always after a few bad days, when you wondering if you should panic. If technical analysis works so well, why don’t they ever see these things coming and mention it? I’m not picking on any one particular pundit here – all of the active traders are the same. Go back and pull up their posts and articles for the last year. In every case you will see that they advise pulling out of the stock market during a correction after all the losses have been incurred. The market then immediately starts to go back up and after a few days or a week (and after the rally is over), they sheepishly advise you to get back in. That’s how you turn a 12% year into a 6% year.

Look, there is no guarantee that the stock market won’t go down over a period of weeks or even months. But we have had two corrections during the first three and a half months of 2014, and the market is still up for the year. And for the market to be down over a long period of time absent some major catalyst (a recession, the bursting of a major bubble, the crash of a top five economy overseas, etc.), would be so unusual as to border on the unprecedented.

For as much as people think the TSP strategy which I write about here is aggressive because I am usually only invested in one TSP fund at a time, it is basically a buy and hold strategy. We buy and we hold until the economy indicates that it is going to contract, and then we get out until it is done doing so (with a little tweaking every year or two to try to capture a few extra percentage points as the economy changes.

The economy is not perfect right now by any stretch of the imagination, but it is continuing to grow. And when the economy grows, the stock market will go up no matter what happens in the short term.

Traditional vs. Roth TSP

I have also posted a new writeup explaining the Roth TSP and detailing under which circumstances that alternative might be right for an investor. For most Federal employees the traditional TSP makes more sense, but for some Feds (and for many Military investors), the Roth TSP will likely result in higher returns when they reach retirement. You can read that post here: Traditional vs. Roth TSP

TSP Allocation Guide Performance (because at the end of the day, that’s why we are here):

Year to Date: 1.34%

12 month: 25.22%

2013: 38.35%

The March 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 (these indicators are explained in some detail in How to Determine the Current Phase of the Business Cycle):

(1) employment numbers: the March 2014 jobs numbers come from the Bureau of Labor Statistics. More jobs were created than lost, which is what is important to us:

Total nonfarm payroll employment rose by 192,000 in March, and the unemployment rate was unchanged at 6.7 percent.


US Unemployment Rate 0414 - TSP Allocation Guide

(2) money growth: 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). I obtain this data from the Federal Reserve.

Money Supply M2 in the United States increased to 11158 USD Billion in March of 2014 from 11127.30 USD Billion in February of 2014. Money Supply M2 in the United States averaged 3269.52 USD Billion from 1959 until 2014, reaching an all time high of 11158 USD Billion in March of 2014.

This continued upward trend is what we are looking for to confirm we are in the recovery phase:

Money Supply M2 042014 - TSP Allocation Guide(3) the stock market: a trailing indicator as it relates to the economy for the most part, but worth tracking on a monthly basis for signs of significant disruptions. The TSP C Fund is up 2.41% year to date, and the TSP S Fund is up 1.34%.

S&P 500 year to date 04162014 - TSP Allocation Guide(4) yield spreads: I obtain my data for this section from the Cleveland Federal Reserve. The yield curve flattened slightly last month, but the spread remains huge, which indicates a very, very low probability of recession. The Cleveland Fed notes:

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 March at 1.81 percent, up a bit from the February’s estimate of 1.74 percent and a bit more January’s 1.48 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.

The below chart shows the historical probability of recession based on where the yield curve is now:

Recession probability from yield curve(5) Purchasing Managers’ Index (PMI): as usual I went to the Institute for Supply Management and pulled up their most recent report (remember that any number above 50 indicates economic growth):

Economic activity in the manufacturing sector expanded in March for the 10th consecutive month, and the overall economy grew for the 58th consecutive month.

The March PMI registered 53.7 percent, an increase of 0.5 percentage point from February’s reading of 53.2 percent, indicating expansion in manufacturing for the 10th consecutive month.

The following table shows the progression of the PMI over the last year:

PMI 12 month - TSP Allocation GuideSo again, all of the indicators are pointing in the same direction, and I believe that we remain in the Recovery Phase of the Business Cycle for all of the reasons which I described in my earlier post on The Business Cycle Theory of Investing. For that reason, I remain 100% invested in the TSP S Fund.

The Other TSP Funds

I’ve told you that I think we remain in the recovery phase of the business cycle, and that small caps (the TSP S Fund) typically perform best during this phase. But what do I think about the other funds?

TSP C Fund: The C Fund will perform fine, but historically the TSP S Fund will outperform in this phase of the business cycle. You really aren’t diversifying by choosing a slightly different basket of US stocks, so I don’t see any value in splitting my allocation. The TSP C Fund did better over the past month because the big damage in the market was inflicted on the biotech and high P/E internet stocks in the NASDAQ, which is disproportionately represented in the TSP S Fund.

TSP I Fund: In addition to what I have said in each update for the last six months, the conflict between Russia and Ukraine has the potential to tip Europe back into recession if uncertainty inhibits earnings, spending and growth. The TSP I Fund may well have some strong months going forward, but I don’t see a basis for predictable gains. If you haven’t read it yet, I’ve got a post on the TSP I Fund which explains under what circumstances it performs well here: The Best International fund of the 1970’s Today.

TSP F Fund: The F Fund is up 2.34% year to date.The Fed’s taper of Quantitative Easing will likely result in interest rates continuing to trend up, which will typically result in flat to negative returns for the TSP F Fund until they stabilize (see the F Fund vs G Fund post for the details on why that will happen).

TSP G Fund: The TSP G Fund would be my safe haven of choice these days, if I needed a safe haven. The G Fund is up 0.67% year to date.

TSP L Funds (the lot of them): If an investor just doesn’t want to bother looking at things for 40 years, an L Fund would be better than the default TSP G Fund. But I believe we can do better than the mediocre to average returns which the L Funds are engineered to achieve. The best performing of the TSP LifeCycle Funds (the L 2050) is up 1.81% so far this year.

Individual stock picking for fun (and occasional profit)

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. While I have had some great winners over the years, overall I would have been much better off if I had put all of the money I have invested in individual stocks into those index funds. So this is Vegas money, just for fun. Really.

I just did my taxes. Last year (one of the best years in the history of the stock market) I lost money overall on the individual stocks which I sold. In fairness, I have made a lot more on paper on the stocks which I still own than I have lost. But the hard fact is that a number of stocks which I had great hopes for floundered, some of them going to almost zero. For every Celgene, I had a Hana Bioscience. See the paragraph above.

I previously mentioned the prospects for good buying opportunities in the next few months in the biotech sector and among Business Development Companies (BDCs) (which are small, publicly traded private-equity firms):

Biotechs: as predicted, biotechs were hit very hard over the past month and that was the primary driver for the down markets. I believe there is still a good chance they will go lower, so I am not buying more at this point. My favorites remain Celgene (CELG), Gilead Sciences (GILD), and Keryx Biopharmaceuticals (KERX). (I currently own CELG and KERX in my non-retirement portfolio.)

I mentioned KERX in last month’s update. It took a pretty sizable hit during the biotech bashing of last month (to be accurate, it is a biopharmaceutical, not a biotech, but the market tends to lump those together). KERX is up more than 100% in the last year, and more than 400% since 2012. The story here is that KERX has a June 6 FDA date for approval of a compound for treating chronic kidney disease which could replace the Medicare drug on which the most money is spent annually at over $2 billion per year. I think approval is pretty well priced in to the stock price, so I don’t see it doubling (or anything approaching that) if it comes through. But I do believe it will go up from here.

Business Development Companies: BDCs are going to be removed from Russell indexes in June (not because there is anything wrong with them, but because they are basically leveraged ETFs so their inclusion results in the stocks which they hold being counted twice). Approximately 8% of all shares of these companies are owned by funds benchmarked to the Russell 2000 index, so we may see a significant decline as the funds are forced to sell those shares off. BDCs aim for high yields, and tend to get them in an improving economy such as the one we are in now. Prospect Capital (PSEC) has a 12% yield and BlackRock Kelso Corp. (BKCC) has a yield of 11%. It looks to me like these stocks have flattened out, so much of the anticipate drop is likely priced in, but I expect to see more selling as that June deadline approaches.

My favorites for 2014 from the January update:

Facebook (FB) took a pretty good hit this month (along with the rest of the internet sector), but appears to be bouncing back. By all accounts their advertising revenue continues to soar as they monitize the 57% of all adult Americans who use the site. Their next earnings on April 23 will certainly crush the same quarter from last year, but I suspect that is priced in. Instead, the street will be looking to see how much growth they show over last quarter.

INSV reported news which they told us was coming long ago (basically that some payments which they received in the past won’t be coming in anymore). Because it is such a thinly traded stock, just having a few investors react to that news resulted in a pretty significant drop. INSV is a penny stock. It is not a buy or a sell, it’s a gamble. I think it may well trickle back up into the mid 0.20’s which would be a sizable percentage gain from here, but the story with this stock will be successes and failures in new drug trials. If it does well in a trial, the stock may double. If a trial fails, it may get cut in half. This is gambling money – like betting on red or black.

The Next Update

Unless something dramatic happens, I will update this post again during the second week of next month after all of this month’s data comes in. 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 once or twice a day at: @TSPallocation

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4 thoughts on “Current TSP Allocation and Business Cycle Phase Update – April 2014”

    1. TS

      I did exactly what you described in your just-released April update: Listened to one of the pundits, and at the beginning of the week, panicked and put everything into the “G” Fund. I’m conservatively guessing that impulsive move cost me about $15K. [email protected]#$&! Won’t do that again. Thanks for the great blog. I wish you’d been writing it and I’d been following it for the past 18 years. I’d be a millionaire by now! Please keep up the great work, and thanks again.

  1. Since the beginning of the year it seems alot of the pundits either recommending/moving there distribution from S and C funds to the G and/or F funds. Then with the 3.5% decline the last two days of week 1 in April and the 4% decline at the end of week 2 in April most of the rest of the business/market cycle gurus, also recommended safe harbor approaches, that is, except for you. Some of them were even going a bit against their theory to stay safe. I was beginning to get a little antsy so I checked your website which I have come to believe is the most firm on their theory. However, with no update and probably a week to go before you posted one, I was becoming more concerned. So I reread your previous post about your five key indicators but they had Februarys’ data. That was old news and I needed new news based on what was happening. Since you identify your data source for each indicator I went to the sources for your key five indicators and found the March updates. All five were positive. So I stayed in S and it looks like the right choice. Thank You

    I do have two question for you.

    In your section on, “Individual stock picking for fun (and occasional profit)” you make the following statement, “Biotechs: as predicted, biotechs were hit very hard over the past month and that was the primary driver for the down markets. I believe there is still a good chance they will go lower, so I am not buying more at this point.” So why don’t you go to the C Fund for the next several months and switch back to the S Fund when the Tech bashing is over?

    In your experience when the other TSP advisors see a scary day or two, or three… and all move to safety does that volume of followers (or in some case customers) have much impact on the declining price?

  2. First, you are my favorite reader for putting all of that thought into things.

    Your last question first – there are 4.7 million active participants in the Thrift Savings Plan. I’m guessing maybe 25,000 of them regularly read blogs or newsletters like this one or subscribe to one of the paid advice services. But my impression is that most of those readers don’t trade based on what the pundits put out there. The vast majority of those 4.7 million are set it and forget it types and don’t trade at all. In 2012, nearly half of all the investments in the TSP were in the G Fund, and almost 20% were in LifeCycle Funds. And of course the TSP doesn’t exist in a vacuum – it is invested in the overall market, so even if every Fed dumped the C Fund in the same day, for example – that probably wouldn’t set the overall S&P 500 back much, if at all. So all that said, I don’t believe the movement of a few thousand or even a few tens of thousands of TSP investors could have any impact on the underlying indices.

    Your first question is a great one. If I was a full time investor, that might well have been a strategy I could have been smart enough to come up with and execute. But I want to spend a few hours a month thinking about my investments, not a few hours a day or even per week. That also starts getting into the realm of market timing, and I have repeatedly proven to myself over the past 20 years that I can’t successfully do that. So I stick with my buy and hold (except during a recession) strategy, with a few minor tweaks every couple of years. And over the medium term a growing economy always wins out over the short term vagaries of the stock market.

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