I have received a fair number emails about the shutdown and the debt ceiling over the past few weeks, and even a Message Board question (which made me very happy). Today Bill over at FedTrader announced that he was switching to 100% G Fund to and the trickle turned into a torrent (which shows how many common readers we have), so instead of waiting until I get around to putting the monthly update out, I feel like I should get something out explaining where I stand.
So first, a quick explanation of the difference between the investing styles which Bill and I practice. I tread cautiously here because I don’t feel comfortable characterizing what he does or don’t want it to seem like I am suggesting that mine is better or more valid. I like reading Bill’s stuff, sometimes I agree with him and sometimes I don’t, but it is good for me to see what other people people are thinking. I would describe Bill as mixing technical analysis with momentum investing. Which is all good. I am admittedly not a huge fan of technical analysis (probably just because I’m not clever enough to remember what the double tea cup means when Aquarius is ascending), but for my individual stock picks I am a momentum guy. Both of those are market timing strategies – trying to take cues from the stock market (and from media sentiment in the momentum strategy) to buy low and sell high.
In contrast, I try to gauge the economic cycle, which moves at a glacial pace compared to the stock market. As a result, I make a lot fewer moves in my Thrift Savings Plan than Bill does in his, and only react to things which I believe will change the phase of the economic cycle rather than discrete events such as the shutdown, natural disasters, or threats of military action which may change the direction of the market for a few days. You can find a much fuller explanation in my post on discrete events from a few months ago.
Which brings us to today. I am still 100% invested in the TSP S Fund, despite the political maelstrom in DC these days. The shutdown, even if it lasts a few weeks, will not be enough to really impact the economic cycle. A default on the nation’s debt (not raising the debt ceiling), on the other hand, could very well push us back into recession – but I don’t believe that will happen.
I thought we might see a dip as we came into October and I did seriously consider going to a 50% position in the G Fund and buying back in on that dip, particularly because I didn’t see much chance that I would miss out on a big move to the upside. But it wasn’t a sure thing, and that would have been a pretty dramatic departure from the very long term approach which I apply to my Thrift Savings Plan and advocate here.
As far as the debt ceiling goes, I believe that the politicians may well push it right up the wire but then they will raise it. Today it looks most likely they will wait until the bitter end, do a short term extension (probably until just before Christmas when nobody will be paying attention) and then will cut some deal, both declare victory, and move on to the next manufactured crisis. Whatever the specifics of the deal, I don’t believe that there are enough crazies on the Hill who believe that they could survive the economic catastrophe which would result for Congress to allow the US to go into default. If all else fails, Speaker Boehner will allow a vote to raise the ceiling temporarily which moderate Republicans and Democrats will support.
I believe it will be a very choppy next week or two in the Thrift Savings Plan, but I think the above assumptions are pretty well priced in and we will mostly just continue to trade sidewise as we have been. I doubt we will see more than about a 3% drop at worst, although I admit that is more gut than science. And when a continuing resolution is passed (and one will be) and when the debt limit is raised (and it will be), we will see a rally which will more than make up for whatever we might lose between now and then.
So I’m staying the course with the TSP S Fund. That said, for folks who are nervous it would be perfectly fine in the long run for them to move some or all of their balance into the TSP G Fund until that happens so they can sleep more soundly.