Current TSP Allocation and Business Cycle Phase Update – September 2014



Burning Man - TSP Allocation GuideWe had a fantastic August followed by a fairly flat first half of September. The European Central Bank is making some interesting moves which will likely impact the TSP I Fund at some point. I will talk a little bit about Alibaba and Apple in the individual stocks section. And finally, I will add a little incentive for sharing the site by running a contest for a free copy of one of the classic books on investing, A Random Walk Down Wall Street.

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).

August returns:

The stock market had its best August in 14 years and the TSP S Fund led the way with a 4.38% return. I am glad I wasn’t sitting in the TSP G Fund during that little run because of the Sell-in-May strategy or some other rationale, as this will likely make up a sizable chunk of the year’s overall gains in the market.

September so far:

September has been less fun with the S fund down almost 1.5%, but that’s nothing which I am losing any sleep over. Different pundits will have various complex explanations for why the market has largely drifted sidewise for the past couple of weeks, but I think it is simply taking a breather after the sharp run up in August. Sometimes after a period of strong gains during which the market has perhaps outrun its value it will correct down by a few percentage points and then immediately resume its climb, and sometimes it will drift sidewise for a while before resuming its upward trend. Lots of folks on CNBC and on the internet have theories about why it is doing one or the other when these events happen,  but it doesn’t really matter – the market winds up in the same place in the end.

Europe and the TSP I Fund:

Euro - TSP I FundThe European Central Bank reacted to bad economic news in multiple European countries by instituting what has been dubbed QE-Lite. In an effort to jump-start the lagging European economy they have cut interest rates to record levels, instituted strategies to encourage lending to businesses, and pledged to purchase pre-packaged debt.

I have a very long-winded explanation of why Europe is so important to the TSP I Fund in this previous post: The Role of the TSP I Fund in TSP Allocation Strategy (it’s not what you think)

Typically when a central bank institutes policies designed to bolster the economy which also create favorable conditions for the stock market, the saying “don’t fight the Fed” applies and there is a strong presumption that good days are ahead. In this case, however, my impression is that the remedies the ECB is taking are too mild to have a dramatic impact on the economy, so while we might see a short term pop in the TSP I Fund as a result of cheaper money, I’m not convinced it will be enough to help Europe turn the corner on what has been an exceedingly slow and uneven recovery.

Certainly I think the prospects for the TSP I Fund to do well are improved by this action, and will be improved by additional ECB actions which will likely follow in 2015, but I’m not convinced enough to move any of my allocation to the I Fund at this point. I could well be wrong and the I Fund could go on a great tear over the next six months, but I that would be more of a gamble than I am willing to take in my TSP.

TSP Allocation Guide Performance through market close on 08/16/2014:

Year to Date:  6.07%

Year to date TSP fund performance:

  • TSP C Fund:  10.77%
  • TSP S Fund:   6.07%
  • TSP I Fund:    2.86%
  • TSP G Fund:  1.65%
  • TSP F Fund:  4.80%

The contest:

Every month I ask readers to share the website to help their fellow Feds and Service Members. This month I thought I would experiment with something a little more appealing to the capitalists out there and will give away a free copy of A Random Walk Down Wall Street, which is probably the all-time classic book on investing. I will randomly select the recipient from any of our readers who share the TSP Allocation Guide by (1) liking either this post or the main page on Facebook; (2) who tweet this post or the main page to their followers (or re-tweet my Update tweet); or (3) forward the update email to their friends (just cc my address from the email as that is the only way I can see you have forwarded the email).

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

(1) employment numbers: the August 2014 jobs numbers were positive, but were lower than expectations and broke a streak of six straight months with over 200,000 jobs created. I obtain this data from the Bureau of Labor Statistics:

Total non-farm payroll employment increased by 142,000 in August, and the unemployment rate was little changed at 6.1 percent. Job gains occurred in professional and business services and in health care.

US Unemployment Rate August 2014 - TSP Allocation

(2) Purchasing Managers’ Index (PMI): as usual I went to the Institute for Supply Management and pulled up their most recent report. Any number above 50 indicates economic growth, and this month’s reading of 59.1 is the highest since March 2011:

Economic activity in the manufacturing sector expanded in August for the 15th consecutive month, and the overall economy grew for the 63rd consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®. The August PMI® registered 59 percent, an increase of 1.9 percentage points from July’s reading of 57.1 percent, indicating continued expansion in manufacturing. This month’s PMI® reflects the highest reading since March 2011 when the index registered 59.1 percent. The New Orders Index registered 66.7 percent, an increase of 3.3 percentage points from the 63.4 percent reading in July, indicating growth in new orders for the 15th consecutive month. The Production Index registered 64.5 percent, 3.3 percentage points above the July reading of 61.2 percent. The Employment Index grew for the 14th consecutive month, registering 58.1 percent, a slight decrease of 0.1 percentage point below the July reading of 58.2 percent. Inventories of raw materials registered 52 percent, an increase of 3.5 percentage points from the July reading of 48.5 percent, indicating growth in inventories following one month of contraction. The August PMI® is led by the highest recorded New Orders Index since April 2004 when it registered 67.1 percent. At the same time, comments from the panel reflect a positive outlook mixed with caution over global geopolitical unrest.

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

PMI 12 month August 2014 - TSP Allocation Guide

(3) 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 a recession in the future, we estimate that the expected chance of the economy being in a recession next August at 2.76 percent, up a bit from July’s reading of 2.46 percent and June’s probability of 1.99 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 September 2014

(4) 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) continues to expand. I obtain this data from the Federal Reserve.

Money Supply M2 in the United States increased to 11422.4 USD Billion in July of 2014 from 11351.40 USD Billion in June of 2014.

Unfortunately, my chart source hasn’t updated since the report was put out, so the chart is the same as last month.

Money Supply M2 June 2014 TSPAG(5) 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. We are setting all-time highs nearly every week, which is good news because highs beget more highs.

SP500 5 year - 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 Economic 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

TSP C Fund: The C Fund will likely perform just fine and roughly parallel to the TSP S Fund, but historically the S Fund will outperform in this phase of the economic cycle. Just as the S Fund outperformed the C Fund convincingly in August, I believe that when we start to break out again we will see a similar pattern. That said, if someone is frantic about the TSP C Fund being a few percentage points ahead of the S Fund so far this year, it probably wouldn’t hurt to split allocations between the two, and in fact when I put some short-term spare cash into the market at the end of last week, I did just that – buying equal parts VBR (a small-cap, value ETF) and VOO (an S&P 500 ETF).

TSP I Fund: I think things are looking up based on the ECB’s recent actions, but still don’t see a basis for predictable gains in the TSP I Fund.

TSP F Fund: The  Fed’s continued taper of Quantitative Easing will likely result in interest rates trending 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). But that’s what we said at the beginning of the year and interest rates surprised everyone by staying low. Eventually that has to give and the F Fund will suffer.

TSP G Fund: The TSP G Fund would be my safe haven of choice these days, if I needed a safe haven.

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.

Individual stock picking for fun (and occasional profit)

Trader DaveDisclaimer: 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.

The Alibaba (BABA) IPO will dominate the financial press this week. The Chinese e-commerce 800 pound gorilla will start trading on Friday. This is not a start-up, it is a huge company which will hit the market with a $168 billion valuation. Think of it as the Chinese version of Amazon, but note that it is already much larger than Amazon and it already owns such an enormous percentage of Chinese e-commerce. Because of its size and relative maturity, I don’t see this one as a stock which will double or triple in the short term the way a newer, faster growing company might. But I do believe there is going to be a frenzy over the next few weeks as every mutual fund takes a position for appearances (they have to have the hot stocks in their holdings list) and the market tries to sort out where it should be appropriately valued. Note that because the company is domiciled in China, it is not eligible for inclusion in the S&P 500 or other commonly tracked indexes which would drive large, mandatory purchases of shares by ETFs and mutual funds.

I will likely throw a little Vegas money at BABA on Friday to try to catch it on the way up. But it will start trading substantially higher than its offering price and this will certainly be a gamble.

My largest individual position remains Apple (AAPL). I was encouraged by the product announcements last week and the ridiculous pre-sale numbers for the iPhone 6. Apple payments has the potential to add billions in revenue once the technology is adopted (and it will be as credit card networks shift the liability for fraud to merchants and card issuing banks over the next two years). And the Apple Watch is very much an unknown at this point – success will depend on what is developed to bring it to life and how people use it. When the iPad was introduced there were all sorts of possibilities for how it could potentially be used, but nobody really knew what, if anything would stick. The Apple Watch is in the same position now. Again, this is a company which is too large to increase in valuation in leaps and bounds the way it did in the past, but I think it will continue to trend up and outperform the market.

The Next Update

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

What’s in it for me?

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

  1. I have got to add my comments, and let us see if all pans out. First if you could please, to update more punctually, I admit that I do seek your output..and seek your guidance I have always kept my TSP in the S Fund for awhile ( and gained the fantastic returns) but I did step outside the box and did an interfund change to add more to the C fund. I know that I am allowed 2 changes per month and will keep an eye out to make adjustments. A majority of the time both the C and S funds have very similar returns of investment. Could you explain more fully, in lawmen terms of why you still hold firm on S, and don’t split between the two (S and C)?

    1. I have been working on my punctuality since elementary school, but I am afraid it may be a lost cause.

      You are right that the TSP C Fund and S Fund have similar returns and generally track together. I am still invested 100% in the TSP S Fund because historically small caps outperform large caps during the recovery phase of the business cycle. And to take it a step further – across all phases of the business cycle, small caps outperform large caps by about 2.6%. So when all else is equal, I lean towards small caps.

      That said, there is nothing wrong with the C Fund or its non-TSP equivalents. A decent portion of my outside investments are in S&P 500 ETFs (although the majority is in small cap funds).

  2. Thanks, as always, for your very helpful updates. I enjoyed tracking the economic data on my own and coming to the same conclusion as you.

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