THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.
Sorry for the very late update this month – work has been busy to say the least, and I haven’t had the few hours to pull together the charts and content I usually post. I will be very brief this month and forgo all that so I can get something out and address the recent market volatility. If this is your first time reading the site, please do check out some of the past updates so you can see how we typically discuss the various indicators I follow when making my TSP allocation decisions.
For those of you who have been reading me for a while, it will come as no surprise that I scoffed at the talking heads on TV who opined that the market was down earlier in the month because of Ebola or ISIL or any of the other scary events in the news which have no measurable impact on any developed economy, much less that of the United States. Ebola and ISIL are still very much with us, facts ignored by those same pundits as they make up more nonsense to explain the resurgence in the market over the last week.
My belief is the downturn we saw prior to this week was largely a reaction to the September economic numbers coming out of Europe, which appears to be teetering on the brink of recession. That volatility dragged on much longer than the typical random corrections we see five or six times a year, so I am content to blame it on Europe (although we will never really know). The Eurozone’s PMI dropped to 50.5 last month, which is right on the dividing line between predicting growth and recession. Europe may well not fall into an actual recession (and I tend to doubt that it will), but the numbers do indicate to me that it is likely that Europe will remain anemic at best for at least another few quarters.
I have been pounding the drum about the slow but steady US recovery since I started this blog, so why does Europe matter to us? It does because (1) the markets overreact to everything, and (2) we are part of a global economy, and when Europe gets poor, it can’t afford to buy US exports.
Exports comprise roughly 13% of US GDP. That is minor compared to the 25-30% of the GDP of many other developed countries. But compare that to the 5% of US GDP which exports accounted for just 30 years ago. If Europe dips back into recession, it will have a substantial and measurable impact on the earnings of US companies, which will create a drag on our markets.
When Europe does turn positive, however, the TSP I Fund should do very well. The big gains in the stock market come at the beginning of economic recoveries, not when the economy is humming along at full capacity (witness the 30% plus gains we saw here in the US during four of the last five years). So when Europe does finally turn the corner, I expect we will see double digit returns in the I Fund (assuming Japan doesn’t crash).
Very quickly, the numbers from last month (without the typical charts and explanations – if you are a first time reader, check out the evergreen content on the homepage for an explanation of why we look at these indicators):
Unemployment dropped again in September, falling under 6% and into the top of the “full employment” range.
PMI: 56.6% (a drop from August, but still well above the levels at which we get concerned about the prospects for recession)
Yield curve: the yield curve steepened in September, dropping the probability of recession in the next year to under 2%.
I remain 100% in the TSP S Fund. I nearly pulled the trigger and moved half to the TSP C Fund a few weeks ago as I feel we are on the cusp of changing phases in the Business Cycle. I expect that I will make that move before too much more time passes. I believe the US economy will continue to strengthen for the foreseeable future if Europe doesn’t tank, but the US markets will see much more moderate growth as the US reaches full employment and the Fed pushes interest rates higher next year. The TSP C Fund outperforms historically under those circumstances, but I am not quite there yet. I will talk more about that in the next update (assuming I am back to having weekends and evenings again next month). I would be interested in hearing what you think in the comments below or on the message board.
That’s it for tonight. As always, none of this is investment advice and I don’t want for you to do what I do with your TSP just because I am doing it and I know all the investing buzzwords. My goal is to create a forum for discussion, and I describe what I am doing and why to try to stimulate that discussion. If you enjoy that discussion, please subscribe so you know when I post a new update, and share the site with your friends using the social sharing buttons below.
Good luck out there.