Current Thrift Savings Plan Allocation and Underlying Business Cycle Phase – September 2013

This is an archive version of the current update. You can find the current update here.

Updated 09/12/2013: My current Thrift Savings Plan allocation remains 100% in the TSP S Fund.

Based on all of the economic indicators which I describe in my How to Determine the Business Cycle’s Current Phase post, I believe that we remain in the early (recovery) phase which started in Spring 2009, and so I remain 100% invested in the TSP S Fund.

As always, it really only took ten minutes today for me to pull the data which I feel like I need to make that Thrift Savings Plan allocation decision and I will run through that again below.

Before I do that, though, I would like to thank everyone who has shared the website with their friends and colleagues. We have seen some extraordinary growth since I put the first post online in mid-April and, while Google is sending a lot of traffic this way, I believe much of that is due to your passing our information on. The chart below shows our growth in daily visitors: growth chartIf you are finding value here, please do take a second to share this by liking us on Facebook, emailing this to some fellow Feds or service members, or through any of the other social sharing icons below.

I will run through where I get the indicator data I am using and what it means to me when I am making decisions for my Thrift Savings Plan:

(1) employment numbers: This month I went back to the Bureau of Labor Statistics for the August 2013 numbers:

Total nonfarm payroll employment increased by 169,000 in August, and the unemployment rate was little changed at 7.3 percent. Employment rose in retail trade and health care but declined in information.  Both the number of unemployed persons, at 11.3 million, and the unemployment rate, at 7.3 percent, changed little in August. The jobless rate is down from 8.1 percent a year ago.

And the unemployment rate trend continues to be exactly what we want to see:

unemployment rate chart through August 2013 - TSP Allocation Guide(2) money supply growth rate: I obtain this data from the Federal Reserve:

Money Supply M2 in the United States increased to 10770.8 USD Billion in August of 2013 from 10709.7 USD Billion in May of 2013.

This continued upward trend is what we are looking for:

United States Money Supply M2 - TSP Allocation Strategy Guide
(3) the stock market: the stock market (which I really consider to be a trailing indicator even though the Wall Street types like to think that the market predicts the economy) took a breather last month. But that is fine – remember that we aren’t worried about short term swings and fluctuations in the stock market. Take a look at the five year chart below to put last month’s blip into perspective:

S&P 5 Year Chart - TSP Allocation Guide
(4) yield spreads: I continue to get my data for this section from the Cleveland Federal Reserve. The yield spread is huge, which indicates a very, very low probability of recession, and it continues to trend in the right direction:

Yield Curve August 2013 - TSP Allocation GuideTo demonstrate the historic utility of the yield curve in predicting recessions (which is far and away the most important thing we are trying to do here), take a look at this graphic:

Recession Probability from Yield Curve - 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 August for the third consecutive month, and the overall economy grew for the 51st consecutive month. The PMI™ registered 55.7 percent, an increase of 0.3 percentage point from July’s reading of 55.4 percent. August’s PMI™ reading, the highest of the year, indicates expansion in the manufacturing sector for the third consecutive month. The New Orders Index increased in August by 4.9 percentage points to 63.2 percent, and the Production Index decreased by 2.6 percentage points to 62.4 percent. The Employment Index registered 53.3 percent, a decrease of 1.1 percentage points compared to July’s reading of 54.4 percent. The Prices Index registered 54 percent, increasing 5 percentage points from July, indicating that overall raw materials prices increased when compared to last month. Comments from the panel range from slow to improving business conditions depending upon the industry.

So again, all of the indicators are pointing in the same direction, and I believe that we remain in the Early/Recovery/Expansion Phase of the Business Cycle for all of the reasons which I described in my earlier post on The Business Cycle Theory of Investing.

With respect to the TSP I Fund, I mentioned last month that sentiment appeared to be turning on Europe and that I would take a closer look. I did, and I am not convinced. While I believe that we may see some good months mixed in going forward for the TSP I Fund, I believe that there is a significant downside risk as well. I do believe that Europe is exiting their recession, but so slowly and chaotically that we have not seen the sustained uptrend which we have seen in the US over the past four years. And for all of Japan’s recent successes, Abenomonics is still a work in progress. If you have not read our deep dive into the the TSP I Fund yet, you can find it here: The Best International Fund of the 1970s.

For those of you who feel that you need some diversification in setting your best TSP allocation and maintain a percentage in the “safer” funds, I would caution you not to be invested in the TSP F Fund during this period of increasing interest rates. I go into great detail in my F Fund vs. G Fund post, but the nutshell is that as interest rates rise, the bonds held by the Thrift Savings Plan will lose value and the TSP F Fund will do poorly for the foreseeable future (as it has the past several months). It will certainly have a few good positive months mixed in, but the long term trend will be grim.

And if any of your current Thrift Savings Plan allocation is in the TSP L Funds, remember between 6% and 9.25% of your savings are in the TSP F Fund which is almost certain to perform badly inthe near term.

Unless something dramatic happens, I will update this post again around this time in the second week of October after all of the September data comes in. I send out notifications of these updates (or allocation changes) to the email list which you can subscribe to here: SUBSCRIBE

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