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This month I write about the potential impact of the ongoing turmoil in DC and some danger signs from the employment indicator. Once again, this starts treading into political grounds and I’ll remind everyone that I’m not sharing my views on politics or favoring one side over the other, but rather discussing what impact the current craziness may have on my investments.
First up though, I want to thank everyone who donated to support the site after my shameless panhandling in last month’s update. For a little while after the post went live, my PayPal notifications sounded like that scene from Breaking Bad when Walt Jr. created the webpage for people to donate for Walt’s medical bills. (That’s a pretty obscure reference, but totally worth it for those of you who got it.) In all seriousness, I was overwhelmed by the generosity of so many people and will put those contributions to good use.
Speaking of which, I have been trying to transition the site from HTTP to HTTPS which means that any data sent between your browser and the website is encrypted. Not a big deal for a site like this one, but a little step to make it a bit more secure. Unfortunately, that hasn’t gone smoothly so if you have any trouble accessing the site, please let me know so I have more error data to work with.
Bottom line up front: I will be sticking with an allocation of 100% TSP C Fund in both my existing balances and new contributions this month (and probably for the foreseeable future). But remember a few months ago when I said not to attach too much importance to a single poor jobs report and to see what things looked like over a few months? Now we have had three lousy jobs reports in a row. So I’m not as confident as I was and you should probably read that boring economic indicator stuff below which you usually skip.
Thrift Savings Plan Fund Returns
May was a very solid month for the C fund, although I once again wish I had been smart enough to have been in the I Fund this month:
- TSP C Fund: 1.41%
- TSP S Fund: -0.77%
- TSP I Fund: 3.76%
- TSP F Fund: 0.81%
- TSP G Fund: 0.19%
And the TSP Funds year-to-date through 06/09/2017:
- TSP C Fund: 9.68%
- TSP S Fund: 7.31%
- TSP I Fund: 14.58%
- TSP F Fund: 2.62%
- TSP G Fund: 1.03%
Russia, Politics and the Thrift Savings Plan
I will caveat this with reminding you that I didn’t think the UK would vote for Brexit and didn’t think Trump would be elected president, so I have been bad at predicting major political events lately. That said, I don’t think Trump is going to be impeached (GOP controlled House and Senate, public acceptance of behavior which previously would have been disqualifying, lack of a smoking gun, etc.).
But I do think the investigation into Russian interference with the 2016 election and the extent to which members of the campaign either leapt or were pulled into that will last for at least as long as Trump’s presidency. Mueller would not be hiring the prosecution dream team he is if he had been briefed on the evidence and was just making sure the I’s were dotted and the T’s were crossed on a report detailing Russian interference but no collusion on the part of any Americans. People are likely going to prison, but it is probably going to take years for that to happen.
A much lesser issue, but the one which is actually appropriate to discuss on this blog, is what impact that is likely to have on the stock market.
Let’s start with the worst case scenario (or best depending on your politics). If we go all the way back to Watergate, a quick look at the charts would certainly make you believe that the scandal caused the stock market to tank. The break-in took place in June 1972, the market peaked at the beginning of 1973, and then fell about 50% until Nixon’s resignation in August 1974. But that doesn’t tell the whole story. The scandal didn’t begin to envelope Nixon and the White House staff until July 1973, by which point the US economy was already plunging into a recession which was exacerbated by an OPEC oil embargo later in the year which tripled oil prices. To be sure, the Watergate scandal did not help investor sentiment or market stability, but it was not the primary driver of the bear market.
The Clinton impeachment may be even more instructive because it took place during a more modern stock market. The market fell sharply in the months leading up to the release of the Starr report (down 20% from July 17 to September 9, 1998), but the primary drivers of that decline was the collapse of a hedge fund (Long-Term Capital Management) and a Russian economic crisis. And once things came to a head, between the start of impeachment proceedings on October 8, 1998 through the conclusion on February 12, 1999, the market saw a 28% gain.
Which brings us back once again to the conclusion that politics may have some day-to-day impacts on the market, but that medium and long-term results are driven by the economy.
The other Politics
Between the multiple investigations into Russian interference in the election and the battle over health insurance reform, there isn’t going to be much space left this year for major legislation which would potentially benefit the stock market. I don’t think we will see significant tax reform this year (or next), although there will certainly be some tweaks and claims of victory. Increased federal infrastructure spending similarly doesn’t look like it will materialize – in fact at this point it looks like infrastructure spending will decrease over the next few years.
What does that mean for our Thrift Savings Plan investments? I think to some degree the cut to corporate tax rates is already priced into the market, so if it becomes clear that isn’t going to happen we could see a small (5%) correction. But otherwise, as long as the economy keeps growing I don’t think the politicians are going to have much impact for the rest of 2017.
One Last Thing While We are Talking About the Politicians
You probably saw the flurry of articles and tweets about the potential for drastic cuts to Federal employee retirement programs after the White House released its budget proposal. The actual proposal was short on details, but the briefings around it made it clear that they envision implementing a wishlist of Heritage Foundation proposals to gut the system. A good run-down on the key points is in this Washington Post article.
The worst case scenario would include a $5000 cut in actual take-home pay for the average Fed, as well as effectively halving the value of a Fed’s pension by the end of their retirement due to elimination of cost of living adjustments.
The administration’s proposal doesn’t mean all, most or even many of these cuts will actually make it through Congress. And doesn’t reflect the political reality that it is much easier to impose cuts on voiceless future employees rather than current ones. But it is something to keep a close eye on as the budget process gets underway on Capitol Hill because this Congress and administration are more likely to take these actions than any during my Federal service. And once the cuts are made, they almost certainly aren’t coming back no matter who takes office during the next election cycle.
May’s Economic Numbers:
In this section I discuss the key indicator data I use in determining where I think we are in the economic cycle and what that data means to me in deciding how to allocate my Thrift Savings Plan balance. (These indicators are explained in some detail in How to Determine the Current Phase of the Business Cycle.)
Total nonfarm payroll employment increased by 138,000 in May, well under estimates of 185,000 jobs.
To make things worse, jobs numbers for March were revised down from 79,000 to 50,000, and for April were revised down from 211,000 to 174,000. With these revisions, employment gains in March and April combined were 66,000 less than previously reported.
So over the past 3 months, job gains have averaged only 121,000 per month, which is very weak. For comparison, roughly 200,000 jobs were created monthly under Obama during the recovery after the recession ended in 2010. For more comparisons, 166,000/month during Reagan’s entire presidency (with a smaller economy and workforce), about 54,000/month under Bush 1, 242,000/month under Clinton, and 58,000/month under Bush 2 when 2002 is excluded to account for the recession he inherited.
And hourly wages increased just 2.5 percent from May 2016, a decrease from the trend and way below average as you can see in the chart below:
I obtain this data from the Bureau of Labor Statistics.
I won’t panic based on these numbers, but I will be watching closely to see where we go from here.
Purchasing Managers’ Index (PMI):
As usual, I pulled up the most recent report from the Institute for Supply Management. Any number above 50 indicates growth in manufacturing and anything over 43.2 indicates an expansion of the overall economy. The May PMI reading of 54.9 is a strong number:
Manufacturing expanded in May as the PMI registered 54.9 percent, an increase of 0.1 percentage point from the April reading of 54.8 percent, indicating growth in manufacturing for the ninth consecutive month. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
A PMI above 43.3 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the May PMI indicates growth for the 96th consecutive month in the overall economy and the ninth straight month of growth in the manufacturing sector.
The past relationship between the PMI and the overall economy indicates that the average PMI for January through May (56.1 percent) corresponds to a 4.0 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for May (54.9 percent) is annualized, it corresponds to a 3.7 percent increase in real GDP annually.
The last twelve months:
Yield spreads: The yield curve moved up and became slightly flatter in May. I get this information from the Cleveland Fed, who had this to say:
Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate the expected chance of the economy being in a recession next May at 10.4 percent, up from April’s 9.8 percent and March’s 7.4 percent. So the yield curve is optimistic about the recovery continuing, even if it is somewhat pessimistic with regard to the pace of growth over the next year.
Money supply growth rate: 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) increased from February to March.
Money Supply M2 in the United States increased to 13435.60 USD Billion in April from 13390.60 USD Billion in March of 2017.
The growth rate is what is meaningful here, and you can see that it is moving at a good clip:
All of which leads me to believe that we remain in the Mid/Growth/Performing stage of the business cycle and so I am going to continue to allocate all of my balances and contributions to the TSP C Fund.
Things I Like
This is probably a bit of a one-off, but after my work phone was recently upgraded to a Samsung S7 I realized that it was capable of wireless charging and that sounded wonderful since I was fiddling around with cords about a dozen times a day and I just like things like that. Apparently only the SESers in my organization rated free cordless chargers, so I had to find one on my own. I read a lot of reviews and finally settled on a Pleson Ultra Slim Fast Wireless Charger, because it was a top seller on Amazon and for $15, no big deal if it didn’t work.It did work and for some reason it gives me more pleasure than anything else I have bought this year. Setup was as simple as plugging my existing charging cable into the pad. If you have a cell phone capable of wireless charging, you really need one of these.
The Next Update
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