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Good Evening

I have had quite a few emails and LinkedIn Messages asking for my opinion on the markets.  I simply cannot answer all of them, this is the very reason this site was launched years ago:  mass/bulk communication of my views of the market.   So with that said, allow me to share my views.  Note that I remain 100% G-Fund and plan to continue that allocation for the near future.   

The G-20 summit is “over”, and various news outlets and elected politicians are claiming “progress was made”.  To be fair, the final vote is always Mr. Market, and (for now), the markets, reflected by the futures markets, like it, they are up over 400 points for Dow Jones Futures:

However one can only wonder if this “move” will last, much like recent other “up moves” which failed days later, dragging the markets down further.   In support of that question, I offer the following about the G-20 summit:

Tariffs have not been eliminated (as many originally desired).   The tariffs installed on $200B worth of Chinese goods, back in September, remain intact.

China/US have agreed to “keep talking” and have stated “we had a productive meeting” etc.  These are pleasantries which means “we have not agreed on anything” and “we did not finish” what we needed to get started.  Is it a “start” in the right direction ?  Sure.   Is the problem solved ?  No.  The can has been kicked down the road, for 90-days.

The FOMC will undoubtedly raise rates in December.  100%, absolutely, without a doubt.   Their chairman, Mr. Jerome Powell, recently spoke in front of the Economic Club of New York.   His statements in this social setting were somewhat differently toned that what we see in sworn testimony in front of Congress, or in official press releases.   The statements at the meeting were devoured by hungry members of the media, with some even concluding that rate hikes are “on hold.”   I guarantee nothing is on hold.  Mr. Powell basically said what we already know, a close reading of the statement will reveal that.  Furthermore, he even stated that rates are at historical lows.   Guess what direction they will be headed ?   Up.   The press reported that rate decisions will be “data dependent” (they always have been).  Well the data reflects a super hot economy, low unemployment, and inflation hovering at 2% (a previously identified “target” by former FOMC Janet Yellen).   So the data supports continued rate hikes.

Moving forward, additional preliminary indicators exist that the housing market continues to cool (which happens when mortgage rates increase).   The National Association of Home Builders recent survey reflects optimism is at the lowest point for all of 2018.   Housing is a very reliable leading indicator regarding recessions ahead.

Note that the NASDAQ Index has witnessed its 50 day/200 day Moving Average cross, this is known as a “Black Cross” or “Death Cross” which means the underlying index is entering Bear Market conditions.  See chart:

The SP 500 Index, my preferred barometer of things, does not reflect a cross yet, but it is approaching:

In conclusion, I will remain 100% G-Fund for now.   As my disclaimer says, what you do with your TSP is your business.  I still am not comfortable with the climate to wander outside and go back into stock funds, based on the above observations and opinions.

Thank you for reading !    Talk to you soon….

-Bill Pritchard

Good Evening Folks

I got a few emails and messages from some who wanted to “jump back in” to stocks/stock funds when they saw the Dow Jones rally 545 points on November 7, the day after mid-term elections.  The general mantra was “we are missing some gains.”  However as it turned out, those “gains” quickly evaporated when the mid-term “pop” capitulated and reversed lower.  On more than one occasion, I had to use a soft voice and soothe some skeptics, who believed stocks were going to triple the next day.  The purported rally was viewed with suspicion by me, due to its lack of volume.  It appears my crystal ball was accurate:  Using closing data, the Dow Jones index is 793 points lower today compared to the Nov-7 close.  Not exactly the “missed gains” some believed would happen.

Before I go farther, lets talk about recent TSP Fund Performance.   October was brutal, however a look at the chart will reflect that last 12-Month performance had the best gains in the S-Fund and C-Fund, two funds out of ten choices, that I have personally been in myself almost all year.   The I-Fund performance was/is the worst fund Year to Date and last 12-months.

A review of various financial and investing websites (to include TSP sites) seems to theorize that this “downtrend” is merely a “hiccup” or “speed bump” and things are “not unlike a similar selloff in February.”    However things indeed are different.    The following facts were either not known/not on the horizon, back in February:

• Housing cooling off
• Interest Rate Hikes further along then February
• Corporate Earnings from numerous companies below expectations
• Tariff disagreement and threats of sanctions/counter-sanctions
• 30-year Fixed Rate mortgage rate presently at 7 year highs
• Numerous indicators reflecting a slowing economy

As such, in my opinion this downtrend is a new situation and possibly reflects a looming Bear market ahead.  I mentioned in my Oct-23 post that:

“…things may rally back up in the coming weeks, but the “smart money” will sell into this rally (if it occurs…), capturing some last-minute gains, but then, soon after, the bottom may fall out of the markets. A technical indicator, the 50-Day and 200-Day moving average, indeed reflects a possible downturn ahead…”

I still hold that belief, especially if agreement with China does not occur at the G-20 Summit, which begins Nov-30 (17 days away).  Further compounding problems is a very probable rate hike by the FOMC in December.   My crystal ball anticipates additional turbulence in the months ahead.  Lets take a look at a chart of the SP 500:

Apparent in the chart is the fact that the Nov-7 “pop” failed, with the reversal of trend on volume which is average to slightly above average.  The index is back below its 200-Day Moving Average, a negative indication.

In light of recent market behavior, and the previously discussed economic signals in the “background”, I remain 100% G-Fund in my personal TSP.

FYI that Core CPI will be released on Nov-14, this may serve as additional catalyst to send markets lower, if the number is 2.3% or higher.

Thank you for reading….talk to you soon….

-Bill Pritchard

Good Evening

As most know, Nov-6 was the date of the Midterm Elections (unless you voted early).   I have said in prior posts that the midterm elections is one of many trigger events causing stock market angst.   My opinion is any power shift in Congress could potentially derail Pro-business efforts and pro-business tax policy.   As of 11 PM Central Time, it appears that Democrats will take control of the House, and Republicans will have control of the Senate.   The Dow Futures have responded positively to this, see table at 7PM and 11 PM:

Some studies exist that in cases with a Democratic House, and a Republican Senate, this is “good” for the markets but these prior cases are arguably (in my opinion) from a different era of politics, pre-Twitter, etc.  I will not expand further but safe to say I believe the midterms are a point of concern for the markets.  California Democrat Maxine Waters, an vocal critic of President Trump, is expected to become Chairwoman of the United States House Committee on Financial Services, which oversees the banking, securities, and other industries, to include the FOMC, which sets interest rates.  Expect attempts to slow down rate hikes to be met with resistance by the new Chair.

Not until multiple days, post-election, will the “mood” of the markets be identified regarding the election.  It is not known who is getting fired, subpoenaed, or what new investigations will be opened (and on whom) regarding the shift in Congress.  Expect continued discussion of sanctions and tariffs against a variety of countries.  Opinion:  I would “monitor things” before making a decision on a new TSP Allocations.

Lets take a look at what has happened in recent days.   The markets are in what is termed “Attempted Rally Mode”, in which they indeed have “up” days however volume is lagging, or below, the 60 to 90-Day average volume.  To overcome prior sell-offs which occurred in October, the markets will need much more powerful volume.  The markets have displayed six “rally attempts” so far.  Ideally, a “follow thru day” occurs in the very near future, with volume greater than the prior day, with the index closing 1.7% or higher than the prior day.   Without a “follow thru day” soon, the market will likely resume a downward direction.

Lets take a look at the SPY Exchange Traded Fund (ETF) as a proxy for the SP 500.

Some important economic reports will be released in coming weeks, CPI Inflation Data will be released on Nov-14, any Core CPI level 2.3% or higher will trigger renewed inflation fears and add fodder to the justification for interest rate hikes.  Anything below would likely be embraced by the markets.   Additionally, the FOMC will release an announcement on Nov-8 regarding current and future monetary policy.

In sum:  I view the recent action with suspicion, due to the lack of volume.  Numerous threats still exist in the landscape, notably a political power shift, interest rate hikes, and threats of tariffs and sanctions.  With that said, I remain 100% G-Fund in my personal TSP Allocation.

Talk to you soon…..

-Bill Pritchard

Good Evening

Thankfully, October 2018 is now behind us.  A month that historically is a good month, closed in the red, with the SP 500 having its worst monthly loss in seven years, all in a month that should be up.  TSP Fund Returns reflect that all funds, except the G-Fund, closed in the red.  On a 12-month basis, the only negative fund was the I-Fund.  On a Year to Date (YTD) basis, the worst performer was the I-Fund.

My opinion is the market continues to be challenged, primarily by the below things:

1. A possible cooling economy.  “Cooling” can be painted as a super white hot charcoal briquette turning into merely a hot briquette.   Both will burn your hand.  The overall economy is still churning along pretty well.  But numerous signals reflect things may be cooling.
2. Interest Rate hikes in December.  Most believe the FOMC “has no choice now” but to demonstrate independence and freedom from political influence and thus raise rates in December.
3. Midterm election uncertainty.  Midterm elections are November 6, any sway of power from one party to another could be a destabilizing event and put at risk the other party’s initiatives, many of which are Pro-business (US business…) in nature.
4. Unresolved Tariff Situation.  With the G-20 summit scheduled for Nov 30-Dec 1, a lot of hope exists that progress can be made with China regarding tariffs.  But the “proof is in the pudding”, we have seen no movement on this issue yet and tariffs are still expected.
5. Poor Corporate Earnings / Poor outlook ahead.  Numerous companies have reported poor quarterly earnings and/or poor outlook ahead.  Included in this list are well-run and large, dominant players- GE, Kraft-Heinz, Ford Motor Company, 3M, Disney, 

I got a couple of messages from folks regarding this week’s action.  Indeed, the markets rallied.  We are in a tug of war, bulls versus bears, and my status in G-Fund means I am watching the boxing ring, but not in the ring.  Note that a close analysis of the SPY Exchange Traded Fund (ETF), reflects lesser volume each day of the “rally”.   See chart:

In blue, you will see the “sell off” volume growing larger each day, indicating that more folks hit the fire exits each day, versus less.   Then it appeared to have possibly reversed this week (Oct 29 week).   The buying volume trailed each day.  It did not pick up each day, indicating that as time went on, the “number of believers” were less and less.  To reverse the prior damage, volume needs to pick up (ideally exceeding each prior “up” day), and prices need to go higher.   The SP 500 Index is sitting at the 200 Day Moving Average, a widely accepted “caution zone”- anything above is good, anything below is bad.

With that said, my opinion is the markets are indeed in a correction and I prefer to be investing in the G-Fund.   Yes, investing, the TSP site itself labels it as such, the word invest or investment is mentioned seven times on the TSP G-Fund page:    https://www.tsp.gov/InvestmentFunds/FundOptions/fundPerformance_G.html

The TSP site (a site with good information) says this about folks nearing retirement:  https://www.tsp.gov/PlanningTools/RetirementPlanningPhases/nearingRetirement.html

The way in which you distribute your money among the TSP funds should reflect your time horizon and your risk tolerance. The closer you are to retirement, the shorter your time horizon. As a result, your primary focus might shift from growth and accumulation to safety and preservation. Even if your risk tolerance is very high, you may not have time to recover from severe drops in the market if a large portion of your account is allocated to stock funds. If you determine that you have not saved enough, this is not the time to take on more risk than you have the ability to sustain — the better alternative would be to increase your savings.

[Written to target pending retirees…] If you are heavily invested in the stock funds, now is the time to consider shifting to a more conservative allocation, especially if you do not have other retirement funds safely invested elsewhere.

Just wanted to share that for awareness.

Thank you for reading….I remain 100% G-Fund in my personal TSP.

-Bill Pritchard

Good Evening

Just a short note, but in my opinion (everything on this site is all my opinion..) the market action on Thursday Oct-25 was “unimpressive.”  I say this because most of the media was busy high-fiving each other and proclaiming that “the bottom was made” (in one day…) and “things are rebounding.”   What they missed was that the high on the indexes did not exceed the prior day’s high.   Had it done so (which it did not), I would have a different opinion.   See chart:

Until the SP-500 is able to exceed 2745, a nice round number based off the Oct-24 high of 2742.59, my bearish stance will not change.  By definition, a new uptrend must exceed a recent prior high, ideally on healthy volume, and with a “backdrop” of strong/improving fundamentals and positive/improving economic conditions.   The current backdrop includes a cooling housing sector, some fairly big (and arguably well-run) corporations missing earnings (to include Amazon and Google), and some other flames appearing in the windows, indicating that things may turn to ashes soon.

GDP Data will be released on Friday October 26, this is a Catch-22 situation, you can never win with GDP.   A strong GDP is “good news” for the economy, but if anyone has read my posts back in 2014-ish, the recovering economy means the FOMC will raise interest rates, because the economy “can absorb the pain” and higher rates will “tame inflation” (another topic for another day).    A weak GDP is “bad news” because it says things are slowing down, but this may prompt the FOMC to hit the pause button on interest rates.   Long story short, GDP data is coming on Friday October 26 and the market could literally do anything in response.    Most estimate that 3.4 to 3.6% GDP growth will be announced.   President Trump has publicly stated that GDP will be “outstanding.”  The prior GDP was 4.2%.   See graph:

Again, just a quick note to summarize my views of the trading day, the day after the NASDAQ’s worst performance since 2011.   Be cautious when you hear the market is “in a normal correction” (no correction is “normal”, if you catch the Flu every two years it is still not desired…), or that the “jobs reports” are still strong.   Jobs don’t show bad news until companies repeatedly miss earnings, their stocks tank, then layoffs are announced due to “restructuring” and “redefining our business model”.   So jobs are the LAST indicator to use if you are trying to anticipate market downturns.   They indeed are good overall, long-term indicators of the economy.   If full employment exists, then yes, things are good.   Just be careful using unemployment numbers as a bulletproof, error-free, device to forecast the stock market.

Until next posting (when warranted…), thanks for reading and talk to you soon

-Bill Pritchard

Good Evening

As discussed in prior posts, the 2725 level / trendline in the SP 500 index was  important- unfortunately it was breached today October 23.  I have no compelling information or reasons to keep me in stock funds in this time of increased volatility and turbulence, as such,  I will be moving to G-Fund, 100% Contribution Allocations and 100% Interfund Transfer over to G-Fund.    Lets talk a little bit about things as I see them:

Apparent in the chart above is the 2725 level break, this occurred on high volume, a negative sign.  Note that recent “sell off days” were also on high volume, all red flags.   Gold Prices, typically a “safe haven” currency are on the rise:

Numerous things are challenging the markets, I will not regurgitate what I have already said, however the below are the challenges ahead:

• Global trade and tariff concerns
• Rising interest rates
• Poor corporate earnings by Caterpillar and 3M, both large US corporations with global business portfolio.  These companies are among a group of companies believed to act as a barometer for the economy.
• Concerns over Saudi Arabia and death of journalist Khashoggi.  President Trump has threatened economic sanctions and accused Saudi Arabia as participating in a “cover up.”
• 2018 Mid-Term elections:   Any sway of power from one party to another could jeopardize pro-Economy regulation and policy being implemented today.

As reported on this site previously, the housing sector is already cooling off, this has trickle-down impact on the retail sector, construction, commodities, and other areas.  Expect to see “the housing story” to pick up steam in the mainstream financial media in three to six months.   Only a few folks have spoken about this:  much distaste is left over from the 2007-2009 housing-induced, easy mortgage, financial crisis.   As such, this story is not a popular one to talk about.  But all indications are that housing is cooling off.

Also troublesome, is the fact that October is typically one of the best performing months of the year, with a 3+% return for the month:

As we arrive to the last full week of October, the month is negative for the entire month–  it will be almost impossible to obtain a 3% gain between today and Oct-31.   This “behavior” is not reflective of a healthy market.  When a star quarterback suddenly can’t make passes, something is wrong.

In my opinion, things may rally back up in the coming weeks, but the “smart money” will sell into this rally (if it occurs…), capturing some last-minute gains, but then, soon after, the bottom may fall out of the markets.   A technical indicator, the 50-Day and 200-Day moving average, indeed reflects a possible downturn ahead.

In sum, I am changing my personal TSP to 100% G-Fund, both the Contribution Allocation and Interfund Transfer.   If the skies clear up in a month or two, I will re-enter stock funds.   The G-Fund, of many funds, are “shelves” inside a safe, the safe being your TSP Account.   Moving from one fund to another is not “cashing out”.  Until you open the door to the safe, and remove dump the contents on the floor, you are still “investing” albeit in a reduced risk fund.  Do not listen to the “experts” on the internet (more TSP advisory sites and chat groups exist than I can count with both hands…) that claim the G-Fund is not investing or that you should always be in stocks, etc.  I can assure you I have never had trouble sleeping when the markets were shaky and my TSP was G-Fund.  I occasionally get asked about such advice and those sites and quite frankly, most of them are garbage.  Stick to trusted and known information sources, such as Dan Jamison’s FERS Guide or similar reputable sites.  The TSP site itself endorses the use of the G-Fund for account protection:  https://www.tsp.gov/InvestmentFunds/FundOptions/fundPerformance_G.html

With that said, I am enroute to G-Fund.  Will the markets suddenly rally and prove me wrong ?   I hope so.  Until then, I need a little shelter from the storm clouds I think are forming.

Thank you for reading…

-Bill Pritchard

Good Morning

Indeed this month has been a roller-coaster.  October, historically a top performer, will likely under-perform this year; that fact alone is a red-flag itself regarding what lies ahead (if you believe that kind of stuff- I do…).

Lets talk about some of my opinions regarding what is challenging the markets.  Back in July 15, I said this about inflation:

“…However some economic data has started to trickle in which may negatively impact the bull market.  Inflation data, as measured by the Consumer Price Index (CPI), minus Food and Energy, reflects that inflation has risen to all time highs, at a 2.3% 12-month change rate….”

Fast forward to today, and the mainstream financial media is talking about “the inflation story” (reported by me in July).   Inflation is on the rise, but if you look at the below charts, inflation’s rise is much subdued, while interest rates have risen rapidly since December 2015.   Both PCE Inflation (the Federal Reserve’s preferred benchmark) and Core CPI (more widely followed in financial press circles) inflation is shown.  This prompts me to ask “Are rate hikes the proper thing to do ?”

Apparent is that inflation has ticked up, however also observe that shortly after it goes up, the data reflects that it goes back down.  Since 2012, it has been contained in a relatively narrow trading range.   However, in December 2015, the interest rate hikes began, reportedly “in response to rising inflation”.

If we take a look at the most recent Federal Open Market Committee (FOMC) Minutes (LINK: https://www.federalreserve.gov/monetarypolicy/fomcminutes20180926.htm ) we will see this comment:

Allow me to make the observation that per the Federal government’s own Department of Labor data, unemployment is at the lowest it has been in history.  I did not invent this or otherwise make it up.  It is what it is.   So I must ask:   Why is the FOMC insistent on continued rate hikes ?   I do not have the answer.   My opinion is they should throttle back on rate hikes and put the rate-hike pistol back into the holster for now.

Lets talk about the SP 500 Index, my benchmark barometer for the health of the markets.   The index was doing “fine” until October 4, when all heck broke loose.   In recent weeks, the International Monetary Fund (IMF) cut global growth forecasts (citing trade tensions), a Saudi journalist was reportedly hacked to death in the confines of a diplomatic consulate building (prompting threats of economic sanctions on Saudi Arabia) and the minutes from the September FOMC meeting were released.   See graphic:

One reason I did not pull the ejection handles over to G-Fund (panic response) was I wanted to assess the scene first.  In aviation, the first thing a Pilot is trained to do when an emergency arises is “wind your watch” – in other words, breathe, assess, then act.  The action in October resembles a panic response (by others) to numerous news events, but as I have said before, the “economic foundation” is very strong.   Jobs, innovation, productivity, etc is still very strong in our country.  The markets will indeed be impacted by continued interest rate hikes.   I feel this is the #1 threat against the market, with the #2 threat being inflation.  Tariffs also have the potential to hurt the markets, even though “I get it” as to why President Trump wants them.  However my personal opinion is the stock markets are not going to like tariffs.  The housing/real estate sector is already cooling off, as reported by Bloomberg on October 15:  https://www.bloomberg.com/view/articles/2018-10-15/housing-prices-may-have-entered-a-cyclical-downturn

Housing impacts other industries, banks, retail (Home Depot, Lowes), manufacturing, textiles (roofing products, lumber), and other industries.   When housing slows down, it contaminates other areas and is not something the already weakened stock market needs.

The 2725 level in the SP 500 what I am watching next:

A downward penetration of this level reflects a high probability the market will go lower.   This will trigger the oft-asked question:  “Why get out now?   We are already down, it is too late.”   Allow me to remind the audience that the G-Fund is considered an investment vehicle, albeit a reduced rate of return.   The TSP website itself says this:  Consider investing in the G Fund if you would like to have all or a portion of your TSP account completely protected from loss.

Note that it takes months for large institutions to “unwind” positions, so any additional problems we see this month or next will likely result in much more severe downward action three to six months ahead, something I don’t want my TSP exposed to.

In sum:  My TSP allocation has not changed, but a downward break below 2725 on the SP 500 will likely trigger a change to the G-Fund in my personal TSP, unless clear and convincing evidence exists against it.

Again:  I have made no changes to my TSP, however a move to G-Fund may be in my near future.

Thanks for reading…

-Bill Pritchard

Good Morning

Hope everyone is having a good weekend.   Some news to share, according to reporting by Federal News Network, (former) OPM Director Jeff Pon has resigned abruptly, and a replacement has been named.   Links discussing this are here:

Trump names OMB deputy to replace Pon as OPM director

https://www.whitehouse.gov/presidential-actions/president-donald-j-trump-announces-intent-designate-individual-key-administration-post/

Readers will recall that OPM Director Pon was a key proponent of numerous changes to federal employee benefits, which I discussed on my May 20, 2018 post 

Amongst Pon’s proposals, were:

• Eliminating Federal Employees’ Retirement System Annuity Supplements
• Modifying Annuity Supplements From a High 3 Average to High 5 Average Salary
• Increasing Contributions to Federal Employees Retirement System
• Reducing or Eliminating Retirement Cost-of-Living Adjustments

Readers will recall reporting both here and via Dan Jamison’s FERS Guide, that these initiatives seemed to have stalled out in recent months.   My post (before Pon’s departure) on May 20, 2018 outlines six reasons why I believed it will be hard to accomplish those proposals.

In sum, after spending seven months at OPM, Mr. Pon is no longer at the agency.

-Bill Pritchard

Good Evening

Entering the “final stretch” of September, historically a poor performing month for the markets, we are faced with some storm clouds ahead.  I have discussed these clouds in prior posts and unfortunately all remain in our path.  I will discuss this shortly, however first lets take a look at August TSP Fund performance:

As can be seen, the I-Fund was again the worst performer for the recent reporting period (August), and remains the worst Year to Date (YTD) performer of all the funds.  The “It is not a real investment” G-Fund outperformed the I-Fund in both instances above.  To be clear:  you could be 100% G-Fund and you would have outperformed 100% I-Fund.  The top performing funds of all ten choices remain the S-Fund and C-Fund:  I have been investing in both (and posting my TSP Allocation on this site) since December 2017.

Moving forward, this post is being written on September 25, 2018.   By the time you read it, the FOMC may have concluded its September 25/26 meeting and elected to raise interest rates, expected to be increased by a quarter point.   The markets have likely “priced this into things”- as such they may not sell off, but my crystal ball is sometimes broken.   More importantly, in my opinion, is the language used by FOMC Chairman Powell at the post-meeting press conference, if the economy is growing and strong, this may cause the markets to respond positively in coming days.    Some head winds exist, all my opinion…discussed below…

Tariffs:  I am personally concerned that implementation of tariffs can indeed impact the economy.  My views on this have become more polarized in recent months.  I recognize the “good intent” and the “well-meaning idea” behind it, however my amateur opinion is the price has to be absorbed, or passed onto, somebody, most likely the customer.  Tariffs, and retaliatory tariffs by the “opposing side” may be negative for the economy. Most MBA programs teach that big corporation’s #1 goal is retain, or improve, shareholder value, this is done via “making money” – profit and earnings (not sales).   As such, if you absorb the costs, this impacts your bottom line.   If you pass the cost to the customer, he may balk and decide he is going to scale back consumption of the product or terminate the consumption of the product entirely.   This, too, impacts the bottom line.   Remove the tariffs from the equation and things work in a free market environment, the highest quality product typically outsells the competitor, and there is minimal governmental involvement.   My very simple view of things causes me to conclude that costs passed onto the consumer will result in an inflationary effect.

Inflation:  Discussed in prior posts, inflation has picked up somewhat in recent months, approaching ten-year high levels (Sept 2008 Core CPI was 2.5%).   On a brighter note, August 2018 Core CPI data has come in at 2.2%, below its 2.4% level in July.   A flattening or decrease in inflation will be positive, however as discussed above, using tariffs (and their inflationary effect) to “help” the economy may be akin to believing that fat-free sugar cookies and sour cream on a wheat bagel are healthy food choices.  Well intended, but probably not the best idea.   My opinion.    Core CPI Inflation chart below:

Interest Rates:  The hot ticket items the market is concerned with are inflation, and interest rates.  The FOMC is raising rates to “contain” inflation, the theory being that if it becomes expensive to borrow money, spending will slow down, and the reduced demand for goods will cause prices (the inflation side of the equation) to come down.  As stated in numerous posts over the years on this site, if you consider the economy to be a sick patient in the hospital, the FOMC is the medical team.   Once the patient heals up and gets better, medical intervention (low-interest rates, Quantitative Easing, etc) ceases.   Our economy indeed is doing very well (important to note is almost all data is historical in nature, not predictive), the downside to this is interest rate hikes.  I do wonder if tariffs introduced at the same time as interest rate hikes, will have a detrimental effect.  I think we are in uncharted territory: we may not learn what, if any, effects occur until a year or two from today.

Political Climate:  We are fast approaching the Congressional “mid-term” elections, and shockingly basically 24 months from the next Presidential election (Nov 2020).   History reflects that Presidential campaign activity typically begins 18 months prior to the election, so expect to see the contenders from various parties to be identified and on the campaign circuit in mid-2019.  This may (or may not) be a trigger for major investors to exit stocks and move their money into safer investments, any such move would send stocks lower.

Housing Data:   Data from various sources seems to reflect that housing is cooling off.  Homes are sitting on the market longer than they were a year prior, surveys of builders reflect that optimism has decreased slightly, and my opinion is that rising mortgage rates may cause a continued slowdown in housing.   When housing cools off, this is a semi-decent indicator of a recession ahead.  Chart of 30-Year nationwide mortgage rates is below:

As always, the ultimate barometer of things is the market itself.   With that said, lets look at the SP 500 Index, my preferred index to capture the heart of the stock market, since it contains a variety of NYSE and NASDAQ companies across a variety of industries and sectors:

As can be seen, the index continues to make new highs, recently attaining 2940 on Sept-21.   As such, that is the new overhead resistance level, breaking thru this is an obvious positive sign.  The index is well above its 50-day Moving Average, a popular trend identification tool, a positive sign.

Looking ahead, September is almost behind us-  October thru January historically are positive months for stock investing.  Political and economic concerns aside, the market remains in an uptrend, my personal TSP Allocation remains 50% C-Fund and 50% S-Fund.  In the event I become nervous about things or contemplate changing my TSP Allocation, I will post an update here.

Thank you for reading!

-Bill Pritchard

Hello Folks

I have not been on writer’s hiatus and admittedly I should not have allowed almost 1.5 months to go by without an update, however I have only reached a point now where I feel a new post is warranted.  Not many things have changed in the markets, except that summer is indeed over and I can only hope that the trends of the indexes change back upward.   Bottom Line Up Front:  I remain 50% S-Fund and 50% C-Fund.    I do have some opinion-based concerns, which I will touch on below.   Did I say they are my opinion ?  Continue reading.

The I-Fund continues to be the lagging performer as far as stock funds (Lifecycle funds not counted) are concerned, both Year To Date (YTD) and on a last 12-month basis.  As we enter month #9 of the calendar year (September), it is pretty apparent (to me) that the I-Fund is not going to “come around” anytime soon.  Even if it does, it is unlikely to outperform the S/C Funds in the last few months of the year.  My end of year prediction is the I-Fund will be the worst performing TSP all-stock fund for 2018.

I am thankful that I have been in S/C since December 2017, being fully invested in the top two performing funds (out of ten choices) for all of 2018 so far.  

Let’s take a quick look at the TSP return data:

As discussed previously, the I-Fund is suffering due to the US Dollar’s strengthening (not a bad thing…) and various new US federal policies and initiatives to deregulate and improve the US business climate, all of which will benefit US-based companies, versus international ones.   The C-Fund is lagging (not hugely) because many large cap companies, aka Boeing, General Electric, Exxon, are exposed internationally due to their business portfolio.   If the Asian economy is suffering, Boeing may sell fewer airplanes.   Hence you see the C-Fund lagging the S-Fund.

The SP-500 Index attained a new All Time High on August 24, reaching 2876.16.  However as you can see in the chart below, volume action for the entire month of August was lackluster.  This is not desirable, as volume is the horsepower behind price action.  This can be attributed to summer trading, as I have noted in prior posts, the “summer doldrums” occur when many traders throttle back trading and opt to take vacations from the market during the summer.  However without volume, the action will not be “propped up” or sustained, and will fall back down like a weak bottle rocket.   It is my hope that volume promptly returns to the market- if not, we may see trends become unsustainable.

On August 22, 2018, the Federal Open Market Committee (FOMC) minutes were released, and on August 24, FOMC Chairman Powell stated that the economy is strong and while inflation is rising, inflation is not a concern.  While this may be correct, as someone who will rely on the TSP to be an important component of his retirement, I see some concerning things appearing in the distance:

Rising Inflation (as measured by CPI data)

Inflation indeed is rising, whether this is short-lived, or a longer-term situation, is yet to be known.   As FOMC Chairman Powell stated, he is not concerned (yet).  However using the below CPI chart, we see with our own two eyes that it is going up:

July 2018 CPI (minus Food and Energy) was at 2.4%, an almost ten-year high.   Ideally it goes down in the next reporting cycle, or does not continue to go up.  Continued increases over the next three to six months would not be positive for the stock market.

Housing Market possibly getting Soft(er)

The housing market, at least based on early, preliminary research by me, appears to be getting soft.  The Philadelphia Housing Index is an index that tracks approximately 20 companies that work directly in the construction market of the United States and is composed of companies in the building and prefabrication of residential homes, mortgage insurers and suppliers of building material.   The index is in its longest continued downtrend (lasting 8 months, having commenced in January 2018) in over five years:

Is this short-lived ?  I don’t know but it is likely rising interest rates are impacting the mortgage market and the trickle-down effect is that some borrowers are opting out of buying a house until rates come down a little bit.  A chart of current US average 30-year mortgage rates is below.

The housing market and related sectors bear watching, sustained, ongoing weakness in those areas may be a harbinger of a weakening stock market.

Yield Curve Flattening

The “Yield Curve” is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing dates of maturity.   Plotted graphically, the physical appearance of the Yield Curve is an oft used signal for predicting recessionary climates, and stock market crashes.   The below Yield Curve (observe the angle) existed during the early stages of the 2003 Bull stock market.

The current Yield curve is below.  Compare the appearance to the 2003 Yield Curve above.

A “flat Yield Curve” is historically associated to uncertainty ahead.  An inverted Yield Curve is typically believed to be a reliable predictor of a recession.   Some believe that things “are different today” in light of the FOMC’s quantitative easing and other things, yet others place high confidence in this indicator.   In summary, flattening and inversion of the Yield Curve is clearly a yellow caution light for the investor.

The Market Itself

The most important indicator, the market, continues to make new highs.  However in my opinion, we need to put both hands back on the steering wheel, adjust our driver’s seat, bump the cruise control off, and be alert as we enter the final months of 2018 and transition into 2019.

Thank you for reading, and if you find this update useful, please share it with your friends and colleagues.  My personal TSP Allocation remains 50% S-Fund and 50% C-Fund.

-Bill Pritchard