Current Thrift Savings Plan Allocation and Business Cycle Analysis – June 2016

THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.

06/20/2016

TSP advice I fundHappy first day of Summer!

This month I am going to write about the potential effects of this week’s Brexit vote the Thrift Savings Plan. Brexit (British Exit) is a referendum on Thursday in which Britain will vote on whether or not to leave the European Union.

In other news, the web hosting problems seem to be behind us at this point. The site is much faster and has not been going down since I moved it to the new server. If you have any problems accessing the page, please do let me know.

Bottom line up front: I do not plan to change my TSP allocation this month, although there is the potential for a fair bit of volatility as I will discuss below.

TSP performance year-to-date (through market close on 06/17/2016):

• TSP C Fund:  2.45%
• TSP S Fund:  1.89%
• TSP I Fund:   -4.31%
• TSP G Fund:  0.86%
• TSP F Fund:   4.69%

And the TSP LifeCycle Funds are very average for 2016 so far (just as they are engineered to be), ranging from 0.60% to 1.08%.

Brexit and the TSP

Brexit and the Thrift Savings Plan

The financial media will be having a field day this week over the vote on June 23rd which will determine whether or not Britain leaves the EU. They will very cheerfully announce that the global economy will almost certainly fall into a deep recession from which it might never recover if Britain leaves. And they will be so cheerful, because drama draws viewers/readers/clicks, and those generate advertising revenue.

What is happening in London right now is the result of an effort which started in the 1970s to unify Western Europe into a common market and trading block. That part worked really, really well – the EU is the largest economy in the world, the world’s largest trading block, ranks first in both inbound and outbound international investments, and is the top trading partner for 80 countries (by way of comparison, the US is the top trading partner for 22 countries). As one of the wealthiest countries in the EU, England benefits tremendously from free trade within the EU as well as the trade agreements between the EU and the rest of the world.

queen backs brexitSo why on earth would the Brits want to leave? The problem is the Europeans just couldn’t limit themselves to creating a common market and monetary union, instead they tried to create a quasi-super nation with it’s own foreign relations, a legislature which can issue regulations which override conflicting laws in the member countries and three separate court systems which weigh in on sensitive issues such as criminal justice, human rights and immigration. It has evolved into a entity somewhere between a confederation and a federation.

The EU has also grown. From six founding states (all of whom were the sort of European countries who the average Brit felt they could relate to), to 28 (including many nations so far flung that many Brits couldn’t find them on a map, and with whom they feel no common bond).

An unhappy confluence of politics and current events has led to the referendum. While the leadership of both main political parties support staying in the EU, a significant number of Conservatives support leaving. The British version of the Republican Tea Party wing has been leading the charge, with appeals to anti-immigrant and “Britain first” sentiment among the elderly and working class.

A key component of EU membership is a requirement that countries allow free movement of EU citizens between member states. The working class has railed against this provision since the EU was created, convinced that waves of Eastern Europeans were coming to take their jobs. (And they aren’t all wrong, the vast majority of hourly wage workers who I meet when I am in the UK are from other parts of Europe). But more recently, the fear is that the huge numbers of refugees and migrants from the Middle East and Africa who have been pouring into continental Europe will soon have their EU passports and will be free to relocate to London.

Nobody took any of this very seriously until recently because “remain” was leading comfortably in the polls and the political leadership couldn’t believe that something this monumental could happen without their support. But over the past month the polls drew even and “leave” took the lead for a period. The latest polls from this weekend have “remain” ahead by a percentage point or two, but it really is much too close to call.

brexit-the-movie-536238
So what happens to the TSP funds if Britain leaves the EU, and what happens if it stays?

Short term, I frankly believe we will see a relief rally in the stock market either way. The market hates uncertainty, and it has shown time and again that it just wants a decision on big issues. Then, whatever that decision is, the market pretty quickly gets on with worrying about whatever the next big thing is. It is possible we will see a short term drop if they vote to leave, and that would not cause me great angst – I would use it as a buying opportunity.

Longer term, the financial media would have you believe that if Britain votes to leave (1) a financial panic will ensue, (2) the British economy will immediately fall into recession and take Europe and the rest of the world with it, and (3) other shaky members of the EU will bail, leaving a few socialists and cheese eaters governing themselves into the ground from Brussels.

What would really happen is an era of uncertainty. Even if Britain decides to completely leave the EU, that would take place over a period of years and after long negotiations.

That total break is unlikely, however. Key members of parliament have already indicated that if the “leave” vote wins, they will push to have Britain remain within the single market. And that would be politically popular – the voters who want to leave don’t care about trade agreements, they just want Britain’s sovereignty affirmed (and for people who don’t look like them to go home).

And that resolution is not without precedent – countries like Norway, Iceland and Lichtenstein have exactly that sort of relationship, are exempt from many EU regulations, and don’t have to cooperate on justice or foreign affairs issues.

So all that said, if Britain votes to leave I believe we will see some minor panic, the British pound will devalue and capital will flee to the safety of US treasuries, driving down interest rates and strengthening the dollar. If that lasts for a long time, that’s bad for US exports as it makes our products and service more expensive everywhere else. That would have a negative impact on the TSP’s domestic stock funds (the C Fund and S Fund). But I don’t think the panic would have legs – if the vote goes that way the financial system will adjust relatively quickly to a new normal.

The TSP I Fund would likely take a fairly solid hit as a result of a Brexit vote, as UK stocks makes up 20% of its holdings. Any number I throw out here is just a guess, but I wouldn’t be surprised to see a short term decline of at least 10%.

But if I were betting, I would put money on Britain voting to remain within the EU. Change is scary and I think voters will decide it is too scary right now. That doesn’t mean the global economy will suddenly take off and take the markets with it, but more likely that we will continue petering along in our slow growth recovery.

I am maintaining my 15% allocation to the TSP I Fund. I believe the odds are that it will outperform over the mid-term, and it is a small enough amount that if things turn out worse than my forecast, it won’t be a huge blow.

This Month’s Economic Numbers:

In this section I will 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.)

Employment numbers: The unemployment rate declined by 0.3 percentage point to 4.7 percent in May, and nonfarm payroll employment changed little (+38,000)I obtain this data from the Bureau of Labor Statistics.

The number of jobs created was significantly lower than forecasts called for. That isn’t great news, but I don’t attribute much importance to a number like this in any single month. If we see continued weakening over the next few months, that will be something for me to pay attention to.

TSP unemployment June 2016Purchasing 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 this month’s reading of 51.3 is also well above the 43.2 which indicates an expansion of the overall economy:

Manufacturing expanded in May as the PMI registered 51.3 percent, an increase of 0.5 percentage point from the April reading of 50.8 percent, indicating growth in manufacturing for the third consecutive month, following five consecutive months of contraction in manufacturing. 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 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the May PMI indicates growth for the 84th consecutive month in the overall economy, while indicating growth in the manufacturing sector for the third consecutive month.

The past relationship between the PMI and the overall economy indicates that the average PMI for January through May (50.3 percent) corresponds to a 2.2 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for May (51.3 percent) is annualized, it corresponds to a 2.6 percent increase in real GDP annually.”

And here’s a snapshot of the last 12 months – I like the way it is trending:

PMI last 12 months June 2016Yield spreads: The yield curve flattened slightly in May, which ever so slightly increases the probability of recession. 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 8.29 percent, up from April’s 7.33 percent and 7.45 percent in March. 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 April to May. The growth rate is what is meaningful here, and you can see that rate remained strong in the chart below:

Money Supply M2 in the United States increased to 12733 USD Billion in May from 12652.20 USD Billion in April of 2016.

TSPAG money supply May 2016Conclusion

All of which leads me to believe that we remain in the Mid/Growth/Performing stage of the business cycle and so I am maintaining the bulk of my investments in the TSP C Fund, while maintaining my position in the I Fund. I also believe that the probability of the US economy entering a recession in the next year (which is the whole point of this exercise) is low.

Recommended Reading for TSP Investors
This month’s book is The WSJ Guide to the 50 Economic Indicators That Really Matter: From Big Macs to “Zombie Banks,” the Indicators Smart Investors Watch to Beat the Market (Wall Street Journal Guides). It is a very entertaining read and does a great job of explaining all those things you hear about on CNBC or read about in the financial section, but nobody ever explains. I obviously don’t believe that there are 50 indicators which really matter (I tend to look at four), but I learned a ton from this book and highly recommend it.

The Next Update

Unless something unexpected happens, I will send out my next update about this time next month. I send out a notification of these updates (or allocation changes during the month) to the email list which you can subscribe to here: Subscribe. If you want to see what I am reading throughout the month, I also have a twitter account to which I usually post items of interest which I have stumbled across for investors, Feds and the military a few times a week at: @TSPallocation

What’s in it for me?

Mr. BeanI don’t ask anything except that you share the site with your colleagues so we can continue to expand the community of feds and service members helping each other in a free, transparent, no-pressure environment (although if you want to, you can donate to support the site here). You can help by linking to this site from your own webpage or blog; liking it on Facebook; sharing on Twitter and in other investing forums; or actively participating on our Message Board. So if you found this post useful, please share it with your friends and colleagues using the email and social sharing buttons below right now. Thanks!

Current Thrift Savings Plan Allocation and Business Cycle Analysis – March 2016

THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.

03/22/2016

best tsp fundSo after all the Sturm und Drang of the first two and a half months of 2016, we are back to zero. The market (which I typically measure in broad strokes with the S&P 500), was down by as much as 11% year-to-date on February 11th. But five weeks later – and after a stellar rally – it is now back to break-even for the year.

There are a few things responsible for that – solid economic numbers, a rebound in oil prices, and some soothing words from the Federal Reserve.

The economic numbers I will discuss in probably more detail than you want below (but you have to put up with it since that is the very purpose of this monthly update). The nutshell, however, is that the economic recovery is continuing to trundle along, and may even be showing some signs of strengthening. That signal is coming in the area of inflation – last week’s Consumer Price Index (CPI) core numbers (which exclude gas and food prices which can be very volatile for reasons unrelated to the economy) were up 0.3%. Why is that exciting? Because that number coupled with January number made up the strongest two month period in the last decade.  And a little bit of inflation is good (and make no mistake, this is just a little bit of inflation). Inflation means that companies can raise prices a little bit. Which means that they can raise wages a little bit (and they will probably be forced to as the labor market continues to slowly strengthen). Higher wages mean more money to buy stuff which means higher corporate earnings. And of course stock prices are entirely based on corporate earnings over the long term, so higher earnings mean higher stock prices which is what we want.

Oil has rebounded substantially – up 50% in the last month – although where it goes from here is anybody’s guess. If you are a big nerd like me, you may remember last Spring when oil gapped back up over $70, only to fall below $30 before the end of the year. I am not an oil analyst by any stretch, but my suspicion is that there will have to be more pain before enough US oil production goes offline for long enough for prices to find traction at this level.

And finally, the Federal Reserve met last week and didn’t do anything (like raise or lower interest rates). Which was what we expected. What we didn’t expect was for them to say: “What you see here is a virtually unchanged path of economic projections and a slightly more accommodative path.” That is Fed-speak for “We think the economy is fine, but we have belatedly realized that if we raise rates as aggressively as we kept saying we were going to, we are going to blow the entire thing up.” That means no Fed interest rate hikes in the near term, and I would guess perhaps a 50% chance that we will see another one at all before the end of this year. (Unless the inflation we talked about earlier starts to really accelerate, in which case we could potentially see them start to tighten again.)

Why is that important to us? Because money goes where it is wanted. And if you can earn 1/3 of a penny on the dollar annually in bonds, investors know their money isn’t wanted there and they are going to put it into stocks. And so I am sticking with my somewhat overly confident and simplistic line from last month: “If you can do arithmetic, you are putting your money into stocks.

TSP performance year-to-date: (through market close on 02/22/2016)

Year to date Thrift Savings Plan fund performance:
• TSP C Fund:  0.85%
• TSP S Fund:  -1.90%
• TSP I Fund:   -2.33%
• TSP G Fund:  0.44%
• TSP F Fund:   2.29%

And the TSP LifeCycle Funds are very average for 2016 so far (just as they are engineered to be), ranging from -0.31% to 0.44%.

Last Month’s Economic Numbers:

In this section I will 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.)

Employment numbers: the unemployment rate in the United States remained at 4.9 percent in February, while total non-farm payroll employment increased by 242,000. I obtain this data from the Bureau of Labor Statistics.

Unemployment rate TSP 0316

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 this month’s reading of 49.5 is below that range, but above the 43.2 which indicates an expansion of the overall economy. This marked the second straight month of improvement in the PMI after six months of declines, and a sharply higher figure than last month’s 48.2:

Manufacturing contracted in February as the PMI registered 49.5 percent, an increase of 1.3 percentage points from the January reading of 48.2 percent, indicating contraction in manufacturing for the fifth 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 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the February PMI indicates growth for the 81st consecutive month in the overall economy, while indicating contraction in the manufacturing sector.

The past relationship between the PMI and the overall economy indicates that the average PMI for January and February (48.9 percent) corresponds to a 1.8 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for February (49.5 percent) is annualized, it corresponds to a 2 percent increase in real GDP annually.

And here’s a snapshot of the last 12 months:

PMI TSP 0316

 

Yield spreads: The yield curve flattened in February (which just means that the difference in interest rates between short term and long term bonds is not a great as it was before). Based on yield spreads, the Cleveland Fed says:

Using the yield curve to predict whether or not the economy will be in a recession in the future, we estimate the expected chance of the economy being in a recession next February at 8.82 percent, up from January’s as 6.19 percent and nearly double December’s 4.42 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.

The shaded areas in the chart below are actual recessions:

Yield Curve TSP 0316

 

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 January to February. The growth rate is what is meaningful here, and you can see that rate slowed a bit in the chart below:

Money Supply M2 in the United States increased to 12472.80 USD Billion in February from 12418.30 USD Billion in January of 2016.

Money Supply TSP 0316

Conclusion

All of which leads me to believe that we remain in the Mid/Growth/Performing stage of the business cycle and so I am continuing to transition the bulk of my investments to the C Fund, which has been the best TSP fund of 2016 (while maintaining my position in the I Fund). I also believe that the probability of the US economy entering a recession in the next year is low.

Don’t forget the TSP I Fund

I don’t do a full breakdown in this space, but I watch the indicators for Japan, the UK, Germany, France and Switzerland (which comprise the bulk of the TSP I Fund) in an attempt to divine the direction that index will go over the medium and long term. The I Fund was tracking along nearly in lock-step with the TSP C and S funds over the last month until the European markets fell following yesterday’s attack in Brussels which created a little separation.

Continued Transition to the TSP C Fund

I see no reason not to continue moving most of the remainder of my Thrift Savings Plan investments to the C Fund to reflect where I believe we are in the Business Cycle. As soon as I hit publish on this post, I will be heading to TSP.gov to conduct an inter-fund transfer and to change my allocation to 75% C Fund, 10% S Fund, 15% I Fund.

And next month I still plan to complete the transition as follows:

  • April: 85% C Fund, 15% I Fund

I always try to remind readers that this is just what I am doing based on my circumstances, and isn’t a recipe for what anyone else should do with their Thrift Savings Plan. This is just food for thought, not something to mirror unless you have done your own research and considered your own circumstances.

Recommended Reading

Devils financial dictionaryThis month’s recommended book is a new one by Jason Zweig, The Devil’s Financial Dictionary. Zweig is an investing and personal finance columnist for The Wall Street Journal. In this book, he presents the principles of finance in a very amusing way, leveling his sharp wit at the myths and gibberish which Wall Street tries to hide behind. Not a primer on investing, but for investors who already know something about the financial world it is both very entertaining and educational. 

 

The Next Update

Unless something unexpected happens, I will send out my next update about this time next month. I send out a notification of these updates (or allocation changes during the month) to the email list which you can subscribe to here: Subscribe. If you want to see what I am reading throughout the month, I also have a twitter account to which I usually post items of interest which I have stumbled across for investors, Feds and the military a few times a week at: @TSPallocation

What’s in it for me?

This guy and your thrift savings planI don’t ask anything except that you share the site with your colleagues so we can continue to expand the community of feds and service members helping each other in a free, transparent, no-pressure environment (although if you really want to, you can donate to support the site here). You share by linking to this site from your own webpage or blog; liking it on Facebook; sharing on Twitter and in other investing forums; or actively participating on our Message Board. So if you found this post useful, please share it with your friends and colleagues using the email and social sharing buttons below right now. Thanks!

Current Thrift Savings Plan Allocation and Business Cycle Analysis – April 2015

THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.

Thrift Savings Plan squirrel04/18/2015

Welcome back for another quick look at the economy, the stock market, and our Thrift Savings Plan allocation. I will talk below about the things which are creating short-term volatility in the markets (earnings, the Fed, Greece, and China), and the economic indicators which drive our long-term strategy.

I’m running a little late this month because of tax day, but with nothing particularly notable impacting the economy or markets there was no pressure to rush something out.

Bottom Line Up Front

I believe we are still in the recovery phase of the business cycle and so my current Thrift Savings Plan allocation remains 100% in the TSP S Fund (this reflects both my contribution allocation as well as where my existing balances are invested).

Our Global Community

It has been while since I have thanked everyone who has shared the site with their friends and colleagues. We now have feds and military service members from 127 countries on the mailing list. In the time since I started drafting this update the live scan of incoming IP addresses has shown visitors from Zamboanga, Philippines (Camp Navarro, I presume); Kiev, Ukraine (hopefully not hackers); Brasilia, Brazil; and dozens of other exotic places on almost every continent.

Amundsen Scott StationEvery continent except Antarctica, in fact. Which makes me a little sad, because I started talking about wanting a reader in Antarctica two years ago. So if you are a USAP employee reading this at McMurdo, Amundsen-Scott, Byrd, or Palmer, please let me know. And if you have any friends down there, please pass this along to them. Once we get Antarctica I will start badgering our readers at NASA and work to find some Thrift Savings Plan investors on the International Space Station.

I strikes me that it might be entertaining to create a page on the site for photos of some of the more interesting locations our colleagues live and work in. If you have a cool shot of your facility, the view from it, or something else fun to look at, just hit reply to the email update and attach the photo with a caption and I’ll get it online.

Thrift Savings Plan bumpy roadShort-term Drivers of Volatility

The financial media has been having a wonderful time over the past few weeks with the headline-of-the-day to which they attribute market moves which are largely arbitrary. But we are currently in a period of heightened volatility and I believe this will continue over the next few months as we see the divergence between the strategies of the US Federal Reserve and other central banks play out, watch oil prices fluctuate, the strong dollar’s impacts on earnings are realized, and determine whether or not Greece remains in the Eurozone.

Two things to remember when you see the markets bouncing around and the talking heads working themselves into a frenzy:

(1) there is no correlation between volatility and risk when you are a long-term investor;

(2) none of the issues listed above will have an identifiable impact on our long-term returns.

Greece represents a completely insignificant part of the global economy and a very minor portion of the Eurozone. Whether they convince the rest of Europe to restructure their debt and they remain in the Eurozone, or they default and are pushed out will be forgotten a few weeks after it occurs (except in Greece which will undergo a wrenching economic crisis which will last for years if they leave). The markets will bounce as deadlines approach, but it really won’t matter to us either way.

The strong dollar has had a very predictable impact on the earnings of US companies with significant sales overseas. As usual, Wall Street overreacted to the coming change, and as a result 81% of companies which have reported earnings for the first quarter have exceeded analyst expectations (compared to 63% in a typical quarter). This will continue to be a story and an area of concern for the multi-nationals which are losing billions in sales to the strong dollar. It is actually even poised to become worse as the Fed tightens monetary policy (raises interest rates) and the European Central Bank (ECB) loosens (lowers rates through its quantitative easing program). This will slow the US economy over the next few years, but there are no indications to suggest that it will tip us into recession.

Oil prices seem to be stabilizing and even edging up slowly. The lower prices at the gas pump are starting to show up in consumer spending in other areas which is good for the economy. There will be some more swings, but my sense is that the worst of it is over and the markets have largely adjusted to the new prices.

Whether or not the Fed will raise interest rates in June or wait until the Fall remains a favorite topic in the financial media. My sense at this point is that the poorer than expected March jobs report will tip the balance away from a June change and that a rate increase will come in the Fall. But as we discussed last month, the market generally does well in the twelve month period surrounding the beginning of rate increases and the real issue is how often and to what degree they continue to raise rates after that first increase.

Thrift Savings Plan Fund Performance Year to Date

•    TSP C Fund:  1.69%
•    TSP S Fund:   5.55%
•    TSP I Fund:    8.50%
•    TSP F Fund:   2.18%
•    TSP G Fund:   0.55%

I have been in the TSP S Fund for the entire year, so my returns match that fund exactly. I still believe the TSP I Fund is likely to do well under the ECB’s QE program, but haven’t quite pulled the trigger on moving a percentage of my allocation to that fund (I might be inclined to wait for Greece to sort itself out at this point). To me it still seems like a bit of a gamble and I try not to gamble in my Thrift Savings Plan. When/if I do, it will be a relatively low exposure, probably on the order of 10-15%

March Economic Numbers

Things have definitely slowed down, but are continuing to move in the right direction and I’m satisfied that we understand which phase of the business cycle we are in and the risk of recession is extremely low. I am once again going to dispense with most of the charts and discussion about the economic indicator numbers this month and just hit the highlights:

Employment numbers: the March jobs numbers were weaker than expected, but a net increase of 126,000 new jobs keeps us moving in the right direction. The unemployment rate was unchanged at 5.5 percent.

Purchasing Managers’ Index (PMI): as usual, I pulled up the most recent report from the Institute for Supply Management. Any number above 50 indicates economic growth, and this month’s reading of 51.5% is within the range of what we are looking for. But is worth noting this is even lower than last month and is again the lowest number we have seen in more than a year.

Yield spreads: The yield curve turned flatter in March, indicating flatter growth and a slightly higher risk of recession (albeit still less than 5% in the next 12 months). I obtain my data for this section from the Cleveland Federal Reserve.

Money supply growth rate: Money Supply M2 in the United States increased to 11846 USD Billion in March of 2015 from 11826.20 USD Billion in February. The growth rate slowed from the very strong rate we saw in February, but is in line with the average we have seen during this recovery.

Conclusion: So again, all of the indicators are pointing in the same direction, and I believe that we remain in the Recovery Phase of the Business Cycle for all of the reasons which I described in my earlier post on The Business Cycle Theory of Investing, and that the chances of the US economy entering recession anytime soon are very low. For that reason, I remain 100% invested in the TSP S Fund.

Investing Outside the Thrift Savings Plan

My largest individual stock position remains Apple (AAPL). I don’t expect this stock to do anything too dramatic – it isn’t going to double (or go bankrupt) like one of my little biotech gambles – but I do think it will outperform the market over the next year. A number of minor catalysts are possible in the next few months which will likely generate positive news and some growth, including Apple Watch sales (all indications are that sales have exceed projections), the continued spread of Apple Pay, the likely introduction of an Apple TV “skinny bundle” of TV channels which will allow many to cut the cable TV cord, and the introduction of the new MacBook laptop which will be the new standard in the very portable laptop space (it is essentially a retina iPad with a very slim keyboard attached). I keep looking for an exit point to pare my Apple holdings (no pun intended) back to a smaller percentage of my individual holdings, but it hasn’t plateaued.

My charts aren’t working right now, but over the past 10 years, AAPL is up a little over 2,300% compared to the S&P 500’s 74.6%.

The Next Update

I will send out a new update next month after all of this month’s data comes in unless I decide to make a change in my allocation or something shocking happens which requires me to send out an additional email. I send out a notification of these updates (or Thrift Savings Plan allocation changes during the month) to the email list which you can subscribe to here: Subscribe. If you want to see what I am reading throughout the month, I also have a twitter account to which I usually post items of interest which I have stumbled across for investors, Feds and the military about once a day at: @TSPallocation

What’s in it for me?

I don’t ask anything except that you share the site with your colleagues so we can continue to expand the community of feds and service members helping each other in a free, transparent, no-pressure environment. You can do that by linking to this site from your own webpage or blog; liking it on Facebook; sharing on Twitter and in other investing forums; or actively participating on our Message Board. So if you found this post useful, please share it with your friends and colleagues using the email and social sharing buttons below right now. Thanks!

Debunking The January Barometer Myth

January Barometer Myth“There are three kinds of lies: lies, damned lies, and statistics.”

Each year at the end of January, the financial media (and some Thrift Savings Plan bloggers) explode with a bunch of click bait headlines about a so-called January indicator. The theory is that “as goes January, so goes the year.”

Nobody in the financial media actually sells all of their stock holdings if the market is down for the month of January, because they know it is complete nonsense. But that doesn’t stop them from trotting it out every year because they know it will generate page views on the internet, or keep TV viewer tuned in through a few more commercials.

The January barometer is accurately described below as a “Neanderthal statistic.” In a nutshell, if you cherry-pick the right statistics you can prove just about anything you want in the stock market. In actual fact, the January Barometer accurately predicts negative market returns for the full year following a down January just 33% of the time. (That means it is wrong 66% of the time.)

There are numerous articles on the web which expose the January Barometer as nonsense. Two of which I enjoyed for their different approaches were written by CNBC’s Alex Rosenberg and BTIG’s Dan Greenhaus. I have done some light editing and paraphrasing below, but the research and arguments are theirs.

From Rosenberg:

Proponents of the January Barometer point to the fact that over the past 35 years, the S&P 500 has followed January’s direction 71 percent of the time. However, this statistic is skewed by the fact that it includes January in that full-year performance. That means that in years like 1987, when the market rose 13 percent in January but finished the year with a rise of only 2 percent, if an investor had followed the January barometer and bought an S&P 500 fund on February 1st, he would have finished the year with a loss of approximately 10 percent. But because January was included, 1987 is still counted as a success for the barometer.

If we exclude January and only look at the returns from the subsequent 11 months, the January Barometer still appears to predict the S&P’s path 66 percent of the time. The problem is that it is much better at “predicting” winning years than losing ones. Going back to 1979, the S&P rose in 23 out of 35 Januarys. Over the next 11 months, the market rose in 19 of those 23 years, so a positive January predicted a positive February-through-December 83 percent of the time. But in the 12 years when the market fell in January, the market only fell in the subsequent eleven months during four of those years. That’s just a 33 percent success rate. The reason that positive Januarys are a great barometer, and negative Januarys a terrible one, is the same reason that the “January barometer” appears to exist in the first place: Stocks rise.

“It’s Neanderthal statistics,” said Mark Dow, a former hedge fund manager who currently writes at the Behavioral Macro blog. “You could say rain in Scotland predicts the money supply in the U.S., but that’s just because rain always falls and the money supply always grows. Well, stock markets tend to go up.” “It’s one of those rules that traders throw around because we have to have simplicity in the world we live in—otherwise we just have too much information to handle,” Dow said. “And it’s a bull—- rule.”

And from Greenhaus comes the analysis which demonstrates that there is nothing significant about January at all – pick any other month and as that month goes, so goes the 12 months including and subsequent to that month:

It is commonly asserted that January is an important leading indicator for full year performance. In 2008 for instance, January was down by 6.12% and the full year ended up being down 38.5% inclusive of said January. But, a quick look at other months shows the exact same trend.
Taken at face value, the belief that January is an important indicator of the twelve month period imparts greater importance on January than any other month and other twelve month periods. However, when doing the same analysis on other months, we learn that: When February is down, the 12 month return inclusive of that February is 2.0%. When February is up, the S&P 500 returns 12.53% When March is down, the 12 month return inclusive of that March is 3.5%. When March is up, the S&P 500 returns 11.46% When April is down, the 12 month return inclusive of that April is -0.23%. When April is up, the S&P 500 returns 12.87% When May is down, the 12 month return inclusive of that May is 4.39%. When May is up, the S&P 500 returns 11.61%.

We could go on but you get the point. As goes any month? So goes that twelve month period. So don’t let the the fear mongers scare you into making changes in your Thrift Savings Plan based on their nonsense.

Mutual Fund and ETF Equivalents to TSP Funds

The vast majority of my investments outside the Thrift Savings Plan are in index mutual funds or ETFs which I select based on the current phase of the business cycle. I almost exclusively use Vanguard funds and ETFs because of their very low costs and fees.

TSP C Fund:

The TSP C Fund tracks the S&P 500 Index

  • Mutual Fund: Vanguard 500 Index Fund (VFINX)
  • ETF: Vanguard S&P 500 ETF (VOO)

TSP S Fund:

The TSP S Fund tracks the Dow Jones U.S. Completion Total Stock Market Index, which is a mouthful but basically means all US stocks excluding the S&P 500. Although there are about 3200 stocks in this index, it is weighted by market capitalization (they buy shares in proportion to how large the companies are) so it is dominated by mid-cap stocks.

  • Mutual Fund: Vanguard Extended Market Index Fund (VEXMX)
  • ETF: Vanguard Extended Market ETF (VXF)

When the business cycle indicators tell me I want to be in small caps, I generally don’t really want a mid-cap blend like the funds above, so I substitute the Russell 2000 (which is the most commonly used small cap index) or other small cap funds such as:

  • Mutual Fund: Vanguard Small-Cap Index Fund (NAESX)
  • ETF: Vanguard Small-Cap ETF (VB)

TSP I Fund:

The TSP I Fund tracks the MSCI EAFE Index.

  • Mutual Fund: Vanguard Developed Markets Index (VDVIX)
  • ETF: Vanguard MSCI EAFE Index (VEA)

TSP F Fund:

The TSP F Fund tracks the Barclays Capital U.S. Aggregate Bond Index.

  • Mutual Fund: Vanguard Total Bond Market Index (VBMFX)
  • ETF: Vanguard Total Bond Market Index ETF (BND)

TSP G Fund:

The TSP G Fund invests in a very short-term U.S. Treasury security which is specially issued only to the Thrift Savings Plan and provides interest rates similar to those of long-term Government securities, but without risk of loss of value and the ability to trade on a daily basis.

  • No equivalent investment available – the TSP G Fund is a one-of-a-kind security issued only to federal employees through the Thrift Savings Plan.

 

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

THIS IS AN ARCHIVE POST – THE CURRENT UPDATE CAN BE VIEWED HERE.

Updated 10/13/2013: My current Thrift Savings Plan allocation remains 100% in the TSP S Fund.

This month has been dominated by political rather than economic news. I wrote a special update post on the debt limit and government shutdown a few days ago, and my views remain the very much the same today. I believe the market (and our Thrift Savings Plan balances with it) will take a hit tomorrow when it opens after a weekend in which many observers expected to see more progress, but I do believe we will see Congress take action at the last minute to avoid damaging the economy enough to change the phase of the economic cycle we are in.

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 recovery/expansion phase which started in Spring 2009, and so I remain 100% invested in the TSP S Fund.

As always, I will run through the indicator data I used and what it means to me in making decisions for my Thrift Savings Plan:

(1) employment numbers: This month I could not go to the Bureau of Labor Statistics for the September 2013 numbers because they are furloughed. Instead I took a look at various reports from other sources, including this Wall Street Journal analysis:

156,000: The numbers of jobs added in September, according to an amalgamation of several private sources of labor market data.

 

Absent the BLS report, other data, mostly from private sources, offer hints about last month’s job markets. The cumulative result: probably no surprise pop in payrolls or unexpected worsening in unemployment.

(2) money supply growth rate: I obtain this data from the Federal Reserve:

Money Supply M2 in the United States increased to 10815 USD Billion in September of 2013 from 10768 USD Billion in August of 2013.

That 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) continued to trade sidewise last month. But that is fine – remember that we aren’t worried about short term swings and fluctuations in the stock market when we are investing in the Thrift Savings Plan. Take a look at the five year chart below to put the current choppiness into perspective:

TSP 5 year chart October 2013
(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 graphic Oct 2013 TSP Allocation Guide Update

(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 September for the fourth consecutive month, and the overall economy grew for the 52nd consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®. The PMI registered 56.2 percent, an increase of 0.5 percentage point from August’s reading of 55.7 percent. September’s PMI reading is the highest of the year, leading to an average PMI reading of 55.8 percent for the third quarter. The New Orders Index decreased in September by 2.7 percentage points to 60.5 percent, and the Production Index increased by 0.2 percentage point to 62.6 percent. The Employment Index registered 55.4 percent, an increase of 2.1 percentage points compared to August’s reading of 53.3 percent, which is the highest reading for the year.

So again, all of the indicators are pointing in the same direction, and I believe that we remain in the 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.

For those of you who feel you need some diversification in setting your best TSP allocation and maintain a percentage in the “safer” funds, I would still 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 TSP F Fund 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 in the near term.

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

As always, if you find this site useful, it would mean a lot to me if you would share it with your friends and colleagues who are Thrift Savings Plan participants using the email and social sharing buttons below.

Shutdown and Debt Limit Update

10/08/2013

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.

-TS

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:

tspallocation.com 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

As always, if you find this site useful, it would mean a lot to me if you would share it with your friends and colleagues who participate in the Thrift Savings Plan using the email and/or social sharing buttons below.

Advanced Bond Fund Investing with the Thrift Savings Plan

advanced bond fund investing graphicThere is an advanced TSP F Fund strategy for those of you whose retirement investment accounts extend beyond the Thrift Savings Plan. Note that when you look at the constituent parts of the Barclays Aggregate Bond Index tracked by the TSP F Fund, the index contains US Treasury securities. Because the securities issued to the TSP G Fund are preferable to those in the F Fund, some investors take a more complicated approach at times when they would otherwise invest in the F Fund. By dividing the total funds they have dedicated to bonds between the G Fund and two non-Treasury bond funds which they hold in a non-TSP retirement account, they can obtain a comparable yield with lower volatility and no risk of loss for the government portion.

The Thrift Savings Plan’s F Fund is composed of approximately 45% US Government Treasuries and other US agency bonds, 22% investment grade corporate bonds (BBB and higher ratings),  28% Mortgage Backed Securities (MBS) passthroughs, and another 5% in miscellaneous foreign treasury bonds traded in the US. So if I was currently 100% invested in the TSP F Fund with a $100,000 balance and wanted to execute this strategy, I would first change my TSP contribution allocation and conduct an interfund transfer to 100% TSP G Fund. I would next turn to my other retirement accounts (IRA, Roth IRA, or 401K), where, assuming I had sufficient funds, I would invest $44,000 in Vanguard’s Intermediate-Term Corporate Bond ETF (ticker symbol: VCIT), and $56,000 in Vanguard’s Mortgage-Backed Securities ETF (VMBS) or, if you have a strong preference for mutual funds over ETFs, perhaps Vanguard’s GNMA fund (ticker symbol: VFIIX).

There is nothing magic about these percentages, so while I would try to roughly match the TSP F Fund’s investments, it would be fine if they didn’t line up exactly. The example would be more complicated if we were in a rare situation where our current TSP allocation also included the TSP C Fund or the TSP I Fund, but that would simply require us to reallocate the 50% we were pulling out of the bond portion of our allocation within the Thrift Savings Plan, or perhaps shift a higher percentage of our stock fund allocation to the outside retirement accounts. And if you have a 401K plan, of course you are limited to whatever funds are offered in your particular plan and will have to do some research to determine what gives you the appropriate mix of intermediate-term corporate bonds and mortgage backed securities.

All that said, as of this writing (September 2013), I would not be putting any money into the TSP F Fund or any bond fund. I believe that the long term trend for interest rates is up, particularly once the Fed starts tapering QE, and the TSP F Fund will do very poorly as that happens. The TSP F Fund will certainly have a few good months mixed in there as rates fluctuate, but I wouldn’t want to be guessing which months those might be.

I would love to hear your thoughts or questions in the comments below or on the Message Board.

Return to F Fund vs. G Fund in TSP Allocation

Current Thrift Savings Plan Allocation and Underlying Business Cycle Phase (August 2013)

This is an archive page. Click here for Current Thrift Savings Plan allocation update.

Updated 08/12/2013: 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. See my note below about the momentum shift we are seeing in the TSP I Fund.

Once again, although I personally spend a fair amount of time reading business and economic news each day, 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.

I will run through where I get the indicator data I am using and what it means to me:

(1) employment numbers: This month I just went straight to the Bureau of Labor Statistics press release with the July 2013 numbers:

Total nonfarm payroll employment increased by 162,000 in July, and the unemployment rate edged down to 7.4 percent, the U.S. Bureau of Labor Statistics reported today. Employment rose in retail trade, food services and drinking places, financial activities, and wholesale trade.

This is the trend which we like to see:

unemployment rate chart - TSPallocation.com

(2) money supply growth rate: The Federal Reserve has not yet released the July numbers, but I don’t have any reason to believe that the growth trend will not continue. From last month:

Money Supply M2 in the United States increased to 10598.1 USD Billion in June of 2013 from 10552.60 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: Virtually all sectors of the market ended July higher than they started and it is so clear that the market’s upward trend continued in July it is not even worth bothering to bore into the details.

(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 TSPallocation.com

(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 July for the second consecutive month, and the overall economy grew for the 50th consecutive month. The PMI registered 55.4 percent, an increase of 4.5 percentage points from June’s reading of 50.9 percent. June’s PMI reading, the highest of the year, indicates expansion in the manufacturing sector for the second consecutive month. The New Orders Index increased in July by 6.4 percentage points to 58.3 percent, and the Production Index increased by 11.6 percentage points to 65 percent. The Employment Index registered 54.4 percent, an increase of 5.7 percentage points compared to June’s reading of 48.7 percent. The Prices Index registered 49 percent, decreasing 3.5 percentage points from June, indicating that overall raw materials prices decreased from last month. Comments from the panel generally indicate stable demand and slowly improving business conditions.

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, if this was my Vegas money instead of my retirement account, I would be rolling some of my Thrift Savings Plan allocation into the TSP I Fund because I think that it is likely to outperform all of the other TSP Funds over the next few months. I believe that that positive media and investor sentiment on the European recovery has created enough momentum to make that happen. But this is my retirement account, and I don’t want to be buying single ply toilet paper when I’m in my 80s, so I will remain conservative at this point and stick with the TSP S Fund. While I think that we are going to see at least a temporary move in the TSP I Fund, I haven’t devoted the time to really understanding the underlying economies so I am not comfortable enough risk any of my Thrift Savings Planbalance, particularly not when the TSP S Fund is performing at the fantastic levels that it is (up 24% over the last 12 months), and I believe that there is a significant downside risk to the TSP I Fund as well. I will take a closer look at both Europe and Japan before my September update, and may well decide to make a shift then. If you have not read my explanation of 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 TSP F Fund will lose value and the TSP F Fund will do poorly for the foreseeable future (as it has the past several months). 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 in at least the near term.

As always, if you find this site useful, it would mean a lot to me if you would share it with your friends and colleagues who participate in the Thrift Savings Plan by using the email and/or social sharing buttons below.