THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.
Happy Fiscal New Year!
As some of the newer subscribers may have noticed, I occasionally skip doing an update if I get so far into a month that the next month’s data is just days away. September was one of those months, with a combination of travel, the day job (which seems to include a lot of evenings and weekends), and my better half announcing that she is pregnant with our first child (so you can look forward to a thorough writeup on tax-advantaged Coverdale and 529 accounts sometime in the next year). With my buy-and-hold-except-at-major-turns-in-the economy strategy, nothing which pops up in any given month is likely to result in a change, and if there is a major event I will certainly put something out.
Apparently there was also a problem with the email for the August update and some of you might not have seen that one. That was a longer, mid-year update, and it would be worth going back to read that here: August 2017 TSP Allocation Update
This will be a pretty quick update. First up though, I want to again thank the folks who donated to support the site since my last update. Some of you have been ridiculously generous, and it has been genuinely heartwarming.
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).
Thrift Savings Plan Fund Returns
The stock market continued to move up nicely in September:
- TSP C Fund: 2.06%
- TSP S Fund: 4.26%
- TSP I Fund: 2.52%
- TSP F Fund: -0.48%
- TSP G Fund: 0.17%
And the TSP Funds year-to-date (through 10/06/2017):
- TSP C Fund: 15.67%
- TSP S Fund: 14.31%
- TSP I Fund: 20.24%
- TSP F Fund: 3.21%
- TSP G Fund: 1.77%
In the News
It has been an eventful 60 days since the last update. We’ve had hurricanes, Nazis, anthem protests, charter flight scandal(s), and apparently everyone in this White House uses personal email accounts. A few more members of the inner circle were shown the door, North Korea dredged up the word “dotard”, Russia bought a bunch of Facebook ads, and LSU lost to Troy.
What does all of that mean to investors? Nothing really. As we have discussed before, none of these things will have an impact on the stock market for more than a few days unless we see war on the Korean peninsula or an impeachment. Neither of those are at all likely, and the market has responded accordingly. The market hates instability, and in a normal administration several of the issues above would have stocks bouncing around. But the market seems to have recalibrated for the daily chaos of the Trump years, and the reaction has been muted.
September’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.)
September saw the first monthly loss in total jobs in seven years, with a drop of 33,000 jobs. The number dipped into the red only because of the combined hurricanes, although it is worth noting that the estimate coming in of 90,000 jobs created would have been much lower than we are used to.
Total nonfarm payroll employment decreased by 33,000 in July, and the unemployment rate was little changed at 4.2 percent. That lagged estimates of approximately 90,000 new jobs created. The change in total nonfarm payroll employment for May was also revised down from 189,000 to 138,000, and the change for August was revised up from 156,000 to 169,000. With these revisions, employment gains in July and August combined were 38,000 less than previously reported.
Taking a look at employment gains since January 2015, you can see the job gains gradually declining, which is to be expected at this stage in the business cycle to some degree:
Average hourly earnings for all employees on private nonfarm payrolls rose by 12 cents to $26.55. Over the past 12 months, average hourly earnings have increased by 74 cents, or 2.9 percent.
I obtain this data from the Bureau of Labor Statistics.
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 September PMI reading of 60.8 is the strongest number I can remember:
Manufacturing expanded in September as the PMI registered 60.8 percent, an increase of 2 percentage points from the August reading of 58.8 percent. This indicates growth in manufacturing for the 13th consecutive month and is the highest reading since May 2004, when the index registered 61.4 percent. 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 September PMI indicates growth for the 100th consecutive month in the overall economy and the 13th 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 September (57.1 percent) corresponds to a 4.4 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for September (60.8 percent) is annualized, it corresponds to a 5.5 percent increase in real GDP annually.
The last twelve months:
Yield spreads: The yield curve has made a parallel shift upward, with both short and long rates increasing. I get this information from the Cleveland Fed, who had this to say:
Using past values of the spread and GDP growth, our calculations suggest that real GDP will grow at about a 1.3 percentage rate over the next year. […]
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 September at 12.0 percent, down from the August probability of 12.5 percent (an even one-eighth chance), itself a tiny drop down from July’s 12.9 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 May to June.
Money Supply M2 in the United States increased to 13647 USD Billion in August from 13602.20 USD Billion in July of 2017.
The growth rate is what is meaningful here, and you can see that growth has flattened out to some degree between July and August in the chart below (but not something to worry about across a short period):
All of the above data 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.
My investment reading has been interrupted by a deep dive into What to Expect When You’re Expecting, so I will repeat the recommendation from the last update: The Best Investment Writing: Selected writing from leading investors and authors: 1. Meb Faber has put out an annual list of the best articles on investing for several years now, and he is publishing it in book form this year. It is a compilation of the best pieces from a huge collection of the big name money managers and stock market researchers. They have agreed to have their work published in this book because all proceeds are going to charity. Lots of great content broken up into ten minute chunks.
The Next Update
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