Monthly Update Questions

This topic contains 14 replies, has 4 voices, and was last updated by  Anne 3 years, 1 month ago.

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  • #18306

    Anne
    Participant

    I couldn’t post to the update, so I’m starting thread here.

    TS Paul,

    PMI has been on a downward trend for the last 6 months with 4 being below 50. How do you figure this contraction not to be problematic? Or at what level would a number below 50 be considered problematic?

    I was also looking at M2 and trying to figure out what the correlation to the business cycle is. I came across a couple of sites that indicate that M2 has been less reliable in recent years and that it did not signal the last recession, see: https://www.conference-board.org/pdf_free/economics/BCI_March_Essay.pdf

    I hope your outlook is correct but I’m concerned about state of economy. Just trying to figure out this business cycle.

    #18309

    Kristopher

    TS Paul,

    I would like to add to Anne’s question.

    1. By the time you see strong signs for a recession is it too late to switch to the F and G fund? I just figure by the time we see strong signs the market has already dropped considerably because everyone is running for safety.

    2. What are you looking for to move your funds into the F and G fund? The market is weak and we just had a massive correction or which may be the start of things to come.

    I am currently 50% C and 50% F. I lost over 10% of my funds due to this “correction”. I am guessing but it does not seem like to market has that much room to grow in these current economic conditions. It might be flat, you might see some gains but I don’t want to be 100% in C when the market drops again.

    Any thoughts?

    #18318

    Anne
    Participant

    Interesting take on employment/unemployment: http://seekingalpha.com/article/3956940-beware-s-and-p-500

    Looking at historical unemployment, recession periods and major dips in the S&P, there can be as little as .1% to .3% change in unemployment from prior month when S&P falls significantly. Not sure how much the current unemployment rates are accurate prediction of downturn.

    #18319

    Kristopher

    Anne,

    I have similar articles and charts. It seems when unemployment drops it is followed by a recession.

    http://imarketsignals.com/2014/the-unemployment-rate-a-coincident-recession-indicator/

    #18322

    Anne
    Participant

    Interesting link…had to keep in mind when it was written in 2014…I guess the question is when will the unemployment rate bottom out?

    #18323

    Anne
    Participant

    Interesting link…had to keep in mind when it was written in 2014…I guess the question is when will the unemployment rate bottom out?

    #18333

    Anne
    Participant

    Some of the big financial firms downgrading projections with concerns of more downside/recession
    Wall Street Strategists Downgrade Equities Citing Lack of Central Bank Bulletshttp://www.bloomberg.com/news/articles/2016-03-14/wall-street-strategists-downgrade-equities-citing-lack-of-central-bank-bullets

    http://www.bloomberg.com/news/articles/2016-03-14/wall-street-strategists-downgrade-equities-citing-lack-of-central-bank-bullets

    Caution persists as financial markets hit the reset button http://www.reuters.com/article/us-global-markets-risks-idUSKCN0WG21R?feedType=RSS&feedName=businessNews

    “Investors may be enjoying a bit of a respite from recent market weakness, but they should be under no illusion: Challenges remain. The economic signals are mixed at best and continue to confirm both the optimists’ and pessimists’ narratives,” said Russ Koesterich, global chief investment strategist at BlackRock in San Francisco.

    #18334

    rolfeskj
    Participant

    Anne,

    I think most people agree that a slow down / recession is coming. But what we don’t know is when 6-18 months or more and how bad will it be.

    #18336

    Anne
    Participant

    Thanks rolfeskj…still waiting to see if TS Paul will weigh in to original questions above.

    I found the follow articles related to market valuation (oversold vs undersold) interesting:
    –“Market Cap to GDP: An Increase in the Buffett Valuation Indicator” http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP
    –“A Market Valuation Gauge That Works” http://www.advisorperspectives.com/articles/2016/03/15/a-market-valuation-gauge-that-works

    Interesting perspective on QE/low interest rates:
    –“Bearishness Is Strictly For Informed Optimists” http://www.hussmanfunds.com/wmc/wmc160314.htm
    “Bearishness Is Strictly For Informed Optimists”

    #18337

    rolfeskj

    Anne,

    I wish I knew more about the market and what is happening but it seems like everyone is guessing.

    With the Fed keeping rates the same and only talking about pushing out a half point hike all year it is much slower than their previous thought of a whole point. This seems like it will help the market shoot up. But on the down side by doing this the Fed is saying the market is not doing that great and namely thinking foreign markets could derail the US recovery.

    Part of my worries is that all these gains are artificial due to the unprecedented QE at 0% for close to 7 years. Is it just due to the low interest rates that the markets are so high? If the markets were doing so well then why does the Europe and US continue with these low rates?

    Right now I am 30%-C and 70%-F. I am not sure if i should be 100%-C right now to ride the ups swing of Fed holding rates or stay where I am because this bull market cant do another 7 years and I will be safe if another 2008 happens. I mean the S fund dropped from $40 a share to $30 a share in 6 weeks and no one saw that coming.

    #18338

    Bruin79

    I was just wondering the same thing, my C fund finally went into the positive side but the money I have in the S fund is still way down in the negative and often wondered to myself why I’m not %100 in the C fund, is there any big advantage in having a portion of my monthly allocation going to the S fund since it’s been dragging down my TSP for awhile now.

    #18339

    Anne
    Participant

    I’m currently 75% in G/F and 25% in C/I but starting to decrease my position in stocks further the remainder of this month. Since today will be my second IFT, I will only be able to move funds to G. I got risk adverse in January. I just retired 1.5 months ago, so I was not willing to let my TSP fall any further.

    I agree with rolfeskj’s concerns above. US/UK markets are reacting favorably to FED announcement yesterday, other european markets are not.

    Bruin,

    Technically, if you are buying stocks at a lower price it will lower your average out over the long run. But if you are following Paul’s advice, and will be moving to C, you may want to change your allocation to align with you anticipated end state instead,

    #18340

    Anne
    Participant

    I should read what I write before I post. Excuse grammatical errors above.

    Good News — It looks like all TSP Funds should have positive gains today (if nothing changes).

    Happy St Patrick’s Day!

    #18380

    TS Paul
    Keymaster

    Anne/all

    Sorry for the slow response, I have been neglecting the message board while traveling and then got sucked into March Madness a bit.

    The overarching question (how I actually apply the indicators to making decisions about when to pull my money to the safety of the G or F funds) is also a big one, so I didn’t want to give it short shrift. I cranked out my thoughts on the indicators I follow when I started the site and never went back to refine those explanations and talk about decision points, so that is something I need to do.

    To save folks scrolling back and forth, I’ve copied Anne and Kristopher’s questions below.

    First, Anne’s:

    PMI has been on a downward trend for the last 6 months with 4 being below 50. How do you figure this contraction not to be problematic? Or at what level would a number below 50 be considered problematic?

    PMI is just one of the indicators I look at, so a dip to just below 50 for a few months won’t worry me too much. As long as the bond and labor markets are behaving appropriately, I won’t be swayed by a few months of borderline PMI. And because it is a sentiment survey, we often see downturns in the stock market reflected in subsequent months, so to some extent I assume that a few points may be temporarily due to doom and gloom over the corrections rather than actual manufacturing outlook. Finally, a contraction in manufacturing does not necessarily mean a contraction in the overall economy – the PMI typically has to drop below 44 for an extended period of time for that to happen.

    I was also looking at M2 and trying to figure out what the correlation to the business cycle is. I came across a couple of sites that indicate that M2 has been less reliable in recent years and that it did not signal the last recession.

    M2 growth rate is definitely the least intuitive (for me at least) and I will have to go back and dig out the research which convinced me it is worth trying to puzzle out those thousandths every month. I will expand on that part of the site (which I recognize is pretty slim) when I get some time.

    And Kristopher’s questions:

    By the time you see strong signs for a recession is it too late to switch to the F and G fund? I just figure by the time we see strong signs the market has already dropped considerably because everyone is running for safety.

    There is a big difference between a few pieces of negative economic news which might trigger a sell-off and an actual turn in the economy. I don’t worry about corrections such as the ones we have seen recently because the indicators I follow aren’t going to predict those. The signs that a major change in the economy is coming are not entirely consistent from one cycle to the next, but typically recessions are preceded by some pretty strong warning signs. Just off the top of my head, I recall that 2008 was preceded by both inversion of the yield curve and a ramp up in unemployment before the big drops in the stock market. At the time, I couldn’t tell you if it was going to happen the next day or 9 months from then, but it was clear that there was a high likelihood that it was coming.

    What are you looking for to move your funds into the F and G fund? The market is weak and we just had a massive correction or which may be the start of things to come.

    This is overly simplistic, but I’m looking for a combination of the indicators I talk about each month to point towards recession. When they are pointing towards growth, as they have been pretty consistently since 2009, I don’t parse the numbers and look for small signals. Each month if I spend five minutes and see that employment is growing and wages are strengthening, that the yield spread is wide, that M2 growth hasn’t disappeared, and the bottom hasn’t dropped out of manufacturing – I’m done. As long as we are talking about the business cycle strategy, there is really nothing else for me to even look at in an economic environment like the one we are in now. Short and medium term market movements aren’t going to be a factor in that decision for me.

    When some combination of those indicators start pointing in the other direction, I will put the time in to research the details and compare the changes to past cycles. And at some point the evidence is strong enough that you are convinced that the end may be near and you make that long-term decision to get out of stocks.

    The TSP Allocation Guide www.TSPallocation.com

    #18381

    Anne
    Participant

    Thank you for responding TS Paul. Although it helps in understanding where you are coming from, I’m still skeptical. Since the FED is currently anticipating at least 2 rate hikes in 2016; at best, I think the market will continue to go sideways. See the paragraph on Interest Rates with quote from Buffet. http://www.gurufocus.com/stock-market-valuations.php
    As interest rates go up, equities should go down as they are competing investments. The only way for equities to continue upwards would be for the economy to really pick up steam with a substantial increase in production which I do not see happening anytime soon given the oil situation, global economic uncertainties and recent downward trend in PMI.

    You addressed a proper mix of monetary & fiscal policy in the other thread related to QE. Given current monetary policy and the lack of any beneficial changes to fiscal policy in the near term (despite the current election cycle), it seems unlikely that the market will continue to go up without a major pull back IMHO.

    The link above also indicates that the current market is overvalued in comparison to GDP or GNP. The more a look, the bleaker it seems and I’m wondering if the past rounds of QE in the US has distorted the typical market signals used in determining where we are in the current business cycle.

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