Current TSP Allocation and Business Cycle Phase Update – March 2014

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03/18/2014

TSP Allocation Guide LogoWelcome back. I apologize that the update is out so late this month. As usual, I’ll run through the issues dominating the news, give you my views of the February 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)

TSP Allocation Guide Performance (because let’s face it, that’s all you really care about)

Year to Date: 4.57%

12 month: 29.25%

2013: 38.35%

Crimea

Crimea - TSP Allocation GuideThe ongoing conflict between Russia and Ukraine has been blamed for much of the market’s volatility over the past few weeks. My sense is that the Crimea matter is fully priced into the market now, although it will be used as an excuse to bounce things around or as an explanation when there is nothing else obvious. It should have no impact on the US economic cycle absent some significant change in the status quo.

I believe there will likely be some additional conflicts as this sorts itself out, perhaps even some minor military skirmishes. These will have day to day impacts on the market, some perhaps even significant, but should not impact the market at all in the mid to long term. The only way I can see the US business cycle being altered is if a shooting war breaks out which draws in other countries in Western Europe, tanking the European economy and pulling ours down with it. I think the odds of that are extremely low and there would be a lot of intermediate steps between here and there. This is a classic example of a “discrete event” which has no impact on my TSP investing strategy.

China’s Slowing Growth

china slowing growth TSP I FundMuch has been made in the last month about the recent economic data from China which indicates the extraordinary growth of the Chinese economy is slowing. China’s economy slowed noticeably in the first two months of the year, with growth in investment, retail sales and factory output all falling to multi-year lows. Two comments:

(1) The Chinese economy is maturing. While this will certainly have an impact on stocks and funds exposed to the Chinese market, it will have virtually no impact on the stocks held in the TSP S Fund. Nothing I have looked at makes me believe that slowing growth in China will affect the US economic cycle in the near or medium term.

(2) Continued slowing will almost certainly result in the loosening of Chinese monetary policy to promote growth. Loosening in this case will mean lower interest rates so businesses will be encouraged to invest in new facilities and equipment, which in turn will create jobs and consumer demand.

Chinese growth is slowing because the economy is transitioning from a cheap, unskilled labor driven model, to a higher tech, higher paid model. In the process, a significant Chinese middle class is beginning to evolve. In many respects, this development will provide a market for the goods and services produced by US companies which currently does not exist. This will strengthen the US economy in the long term.

The February 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 it 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 February 2014 jobs numbers come from the Bureau of Labor Statistics. More jobs were created than lost, which is what is important to us. The unemployment rate crept up slightly as more job seekers re-entered the workforce, but that is actually a good sign:

Total nonfarm payroll employment increased by 175,000 in February, and the unemployment rate notched up 0.1 percent to 6.7 percent.

 

unemployment rate 0314 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 11,113.0 USD Billion in February of 2014 from 11,011.6 USD Billion in January of 2014.

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

US Money Supply M2 - 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 5% since February 1:

SPX 0201 to date TSP GuideAnd the TSP S Fund is up 6.53% during that same period:

Small Cap 0201 to present - TSP Guide
(4) yield spreads: I get 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 February at 1.74 percent.

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

Probability of Recession 032014 - TSP Allocation Guide(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 February for the ninth consecutive month, and the overall economy grew for the 57th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.

 

The February PMI® registered 53.2 percent, an increase of 1.9 percentage points from January’s reading of 51.3 percent indicating expansion in manufacturing for the ninth consecutive month.

The following table shows the progression of the PMI over the last year, and shows it bouncing back after a poor January number:

PMI 032014 - TSP StrategySo 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

So 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 (it is up 1.78% so far this year), but historically the TSP S Fund will outperform in this phase of the business cycle (as it has this year by almost 3%). 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. That 3% doesn’t seem like a lot – it is only $600 if you have $20,000 in your TSP. But if you have $500,000 in your TSP, that’s an extra $15,000 in the first two and a half months of the year. And you get from $20,000 to $500,000 a whole lot faster if you are compounding at that higher percentage rate.

TSP I Fund: The TSP I Fund is down -0.84% so far this year. 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 because of Europe’s unsteady recovery. 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 2.1% 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 0.5% 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 only 1.6% 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.

There may be 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: the financial media is pushing the theme of biotech stock prices being a bubble. As a result, we are seeing a lot of volatility in even the biggest names in the sector. My favorites, which I will buy aggressively on a significant dip, include Celgene (CELG), Gilead Sciences (GILD), and Keryx Biopharmaceuticals (KERX). (I already own CELG and KERX in my non-retirement portfolio.)

BDCs: 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%.

My double predictions for 2014 from the January update:

Facebook (FB): up 48% since I first mentioned buying in my twitter feed on 12/3/13, and up 26.47% year-to-date. The new ads have rolled out, I’m sure users will hate them, but if they play one video ad a day for over a billion users, their earning over the next few quarters are going to be incredible.

InSite Vision (INSV): is exactly unchanged since the beginning of the year. This isn’t one which is going to go up with the market, it is going to go up (and substantially) based on news. That news will be new approvals or new marketing deals with larger companies. Or if I was good in a previous life, maybe Bausch & Lomb will buy INSV for $1 a share.

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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5 thoughts on “Current TSP Allocation and Business Cycle Phase Update – March 2014”

  1. What do you think about mineral/gas/metal investments my brother is a commodities broker mainly natural gas and petro but it’s all on paper. What do you think about gold silver platinum things you can see and hold. I’ve read a lot about about it and it seems you buy it for over spot value and sell it for under spot value so it’s got to make big changes to make a difference. But then again you see it hold know you have it .

    1. Commodities aren’t something I have spent any time looking at in years. I briefly held a commodities fund about a decade ago but quickly realized I couldn’t make heads or tails of its movements, so I unloaded it and moved back to investments I felt more comfortable with.

    1. Yep, thanks – fixed now. That’s what I get for trying to be fancy and insert multiple photos at once. Kind of makes me wonder why none of the 3600 people who read it before you pointed that out. 😉

  2. JUST FOUND YOU , THIS GREAT ,I HAVE 50,000 IN TSP ,50YEARS TO GO TILL RETIREMENT ( HOPEFULLY )AND HAVE 70% IN ” C ” AND 30% IN ” S “. WILL WAIT ANXIOUSLY TO SEE APRIL POST BEFORE THINKING OF CHANGING THINGS …. THANX FOR HELP

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