The Fed Trader

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

The markets continue to have “summer lethargy”, with weak volumes and volatile action.  The week of July 9 witnessed extreme swings on the Dow Jones Index, with 200 points down one day, and 20o points up the next.  Allow me to discuss some of the recent action, and share a look into my crystal ball in regards to the future.  Dare I say it, but our bull market may be out of steam when 2020 arrives (or sooner).   More on that in a minute.  First, lets look at the most updated TSP Fund returns:

Both June 2018 returns, and Year-to-Date (YTD) returns reflect that the S-Fund performing best, with the C-Fund as the next best performer.  I-Fund yet again is negative in both prior month, and YTD categories, and happens to be negative for the last four out of six months.  Readers will recall my numerous prior posts regarding my personal opinion that I-Fund is not the place to be right now- sadly during the year numerous “other” TSP sites and discussion groups all advocated investment in the I-Fund.  My personal TSP still currently reflects 50% C-Fund and 50% S-Fund, since December 2017.

Some have asked why S-Fund is performing better than the C-Fund, the simple answer is “domestic large caps” in almost all cases have an international nexus to their business model, despite the fact that they are US companies.   Exxon, Boeing, General Motors, Pepsi, all have customers overseas, and depend on global trade to have success, and subsequently will be impacted by threats of trade wars and tariffs, much more so than small cap stocks.   However I still believe they are an important part of my portfolio, and remain 50% C-Fund.

Another observation is that the G-Fund (subject to naysayers and critics…) actually outperformed the L-Income, and L-2020 funds on a YTD basis.   To repeat, “Old G” just beat two other funds.   This is an ideal time to refresh our awareness of the G-Fund.   In earlier days of this website, many would question my statement that G-Fund was ideal for protection and “safety”, and would criticize my use of G-Fund as a “tool” on the path to TSP success.  I typically would identify those close to retirement, the risk intolerant, and the less adventurous, as being some, or all, of the people who may prefer to utilize the G-Fund as part of their portfolio.  The noise was subdued when I reminded folks that this strategy was not some earth shattering epiphany that I created, it was actually from the TSP website itself.  See image below, and link:  https://www.tsp.gov/InvestmentFunds/FundOptions/fundPerformance_G.html

Note that the TSP themselves considers the use of the G-Fund to be “investing”:  To be clear, nobody is “cashing out” their TSP or putting the money under their mattress when they move out of stock funds and into the G-Fund, they continue to invest, albeit in an extremely conservative way (and an equally extreme low rate of return…).    Let me conclude this refresher with stating that I personally do not see the G-Fund in my TSP allocation in the near future, due to my opinion that the stock markets will likely continue upward in the coming months.

Lets move ahead now and take a look at recent market action.  Both the SP-500 and NASDAQ have attained “All-Time-Highs”, albeit on less than average volume.   See charts:

The SP-500 broke thru resistance at the 2800 level, the next level to break is 2875.   We do not want the SP-500 to return below 2800, this behavior would reflect weakness and provide reason to doubt the market’s ability to climb higher.    The NASDAQ attained an 20+ year All-Time-High on July 13, breaching the 7800 level.   Similar to the SP-500, we do not want it to drop back down and display weakness.  There is no overhead resistance level (no “cloud deck” overhead) since it is now at uncharted, fresh highs.  The awesome folks at Investor’s Business Daily report that NASDAQ Accumulation has reached a B-, an improvement from a C (neutral) , reflecting that institutional investors are beginning to take positions again in NASDAQ stocks.

So let’s get to my earlier statement, regarding the bull market and possibly weakness ahead.  Note that catalysts propel (and, repel) the market action.   New politicians, new economic policy, war, innovative inventions, etc have all been important catalysts over market history.   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.  See chart:

Note that the 2.3% level was touched in 2016, then not again until back to 2012.   The prior high was 2.5% in September 2008.  If CPI rises to 2.4% or higher, the markets (right or wrong…) will likely find displeasure with this, and sell off.  If it breaches 2.5%, I can almost guarantee it will be on the cover of the Wall Street Journal and a major news headline.  Continued, consistent, repeat high CPI numbers will likely amputate one of the legs of the bull market.  Note that the FOMC uses the PCE Index, and not CPI, as its primary inflation measure.  

Another item worthy of vigilance is the Yield Curve.

The Yield Curve, as discussed at Investopedia, is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates, and it is also used to predict changes in economic output and growth.  

When displayed graphically, a flat or inverted yield curve is a negative signal for the economy.   We are not flat yet, however fairly close, and similar to the CPI, continued, consistent, repeat days of a flat yield curve may amputate another leg of the bull market.

I would take about rising interest rates however when rates were zero (0%), the FOMC’s gradual increases from zero do not seem to be negatively impacting the markets yet.  Yet.   With two more expected this year, and three likely in 2019, and possibly three more in 2020, the market may be in a different mood in the future.

Another tool in my toolbox is housing data.   A weakness in the housing sector tends to be a reliable harbinger of a weakening economy. We “are not there yet” but one can surmise if mortgage rates continue to go up, home purchasing may be impacted.   Again, “we are not there yet” but it is something to be cognizant of.

Finally, and most important, is the market itself.  Widely known is the fact that the current bull market was born in 2009, at 9 years old, its service life is in uncharted territory.  Add to the environment a heated political climate, Presidential elections in 2020, fears over global trade wars (justified, or not…), and possible future structural issues with the financial system (interest rates, inflation, etc), and Mr. Market indeed has quite an obstacle course ahead.   I remain in stocks, and see no immediate danger ahead, however for the above reasons my opinion is we may see the Bull market cool off in the next 12-18 months.  Markets lead recessions, they go down before recessions, and before negative unemployment data, is observed.   To be fair, unemployment numbers are an important data point for the economy, however they do not predict stock market crashes.  GDP data, price to earnings ratios, the value of the US Dollar, all are about as accurate at predicting stock market crashes as is staring at a thermometer for predicting high winds.

I hope you have enjoyed this update, please continue to share this site with your friends and colleagues.   Thank you for reading and barring any critical or urgent news, I will talk to you again in a few weeks.   My current TSP Allocation remains 50% C-Fund and 50% S-Fund.

Thank you

-Bill Pritchard

Hello Folks

As we enter in the final stages of June 2018, a quick mid-year check of the TSP Funds reveals that the C-Fund and S-Fund are the top performers, on both a Year to Date (YTD) and a last 12-months look back period.  Past performance is not an indicator of future results.  As you are aware, I have been 50% C-Fund/50% S-Fund since December 2017, and am quite pleased with my TSP results so far.   Note:  The S-Fund is the #1 performer, and will likely remain the top performer in the coming months.   I am not 100% S-Fund, as I believe some opportunities exist in the large cap stocks, and thus I desire some “exposure” over there.  2018 has been very volatile- interest rate hikes, saber rattling by heads of state, tariff talk, disagreements between elected officials, they have all caused nervousness in the markets this year.  The I-Fund is the only stock fund that is negative Year to Date.

Here is a graphic of the TSP Funds performance:

Readers will recall my apprehension about international markets, something I still have presently, they will also recall my assertion that our current administration’s policies, regulations, and approaches to the economy should benefit domestic stocks more than international.   All of that has occurred, and my opinion is this will not change for the foreseeable future.

The top performing index is the NASDAQ, which also contains most of the small-cap stocks which the S-Fund is correlated with.   Lets take a look at a chart of the NASDAQ:

Evident is the fact that the index is near “All Time High” status, which was attained on June 20, 2018, when 7806.60 was reached.  This is welcome performance, as the markets historically are negative in May and June.  July is historically a positive month, lets hope that history repeats as we enter July in seven days from now.

Some have approached me and asked if the “Trade War” and “Tariff Talk” is something to be concerned about.  July 6 is the implementation date of the first tariffs on Chinese imports.  President Trump also desires to place tariffs on imported European automobiles.  While it is not known if these tariffs are rooted in economic theory, rewarding voters, or are associated to ongoing disputes with both France’s President Macron and Germany’s President Merkel,  there is no doubt that the financial press loves these topics and indeed it has caused consternation by many.

My opinion:  Our current tariffs on imports are among the lowest in US history, and globally the US has some of the lowest tariffs of any country.  Increasing our tariffs is not a show-stopper for the global economy.   See image:

“Retaliatory Tariffs” levied against the US, while not desired, will not hurt as severely as the financial press reports (my opinion).   I doubt we sell many Buick Enclaves or Ford Focus models in China, or Frankfurt, so tariffs directed against US auto sales overseas may not be as deterimental to our economy as many believe.  It is important to remember that three states voted for President Trump in the last election, all three were critical for his win:  Michigan, Pennsylvania and Wisconsin.  All are have economies based largely on auto, steel, agricultural and textile manufacturing.  So why the tariffs ?  Only one can speculate, but with a sound economy in the backdrop, unemployment numbers at historical lows, and the continued strong performance by small-cap stocks, my recommendation is “buckle up” but there is no reason I can see for me to change my TSP Allocation.

In “Retirement System Changes News” category:  Things have been relatively quiet since we saw various proposals get released regarding our retirement.  I remain firm in my position that many of these changes will not be possible, without a re-write or change of federal law.  It is more doubtful in my mind that this could affect current employees.  Some are concerned about “High-3” versus “High-5” (again, doubtful this will happen…) but many are already capped out and/or have been at their pay grades for years now, the calculation of High-3 or High-5 should not impact a GS-13-Step 10 who has been a Step 10 for many years.  In my opinion, it is doubtful that this will pass.    Benefits talk is outside my wheelhouse, sign up for Dan Jamison’s FERS Guide, he is the expert on that topic.

I spent some time cleaning out old emails, as many know, this website has its roots in an “email list” that a lot of my friends and coworkers were on, since the mid-2000’s.  I probably had 50 people on that list (which became unmanageable).   Ten years ago (time flies), pre-2008 Financial Crisis, I sent the below email, discussing the G-Fund (prior emails before that date also discussed the G-Fund).  Remember, my opinion is that you should consider investing in the G Fund if you would like to have all or a portion of your TSP account completely protected from loss.

Attached is a screenshot of that email, and a graphic of the SP 500:

Hopefully, we don’t see another Financial Crisis.   For my long time (and not so long time…) subscribers, thank you.    Please continue to share this website with your friends and coworkers.

That is all for now, I remain 50% S-Fund and 50% C-Fund in my personal TSP.   Hope everyone’s summer is off to a great start, hard to believe we are approaching July already.   Talk to you soon.

-Bill Pritchard

Hello everyone

My TSP Allocation and contributions remain the same:  50% S-Fund and 50% C-Fund.   I will discuss the markets and economy in a bit, but allow me to “subdue” some fear over recent attacks on the federal retirement system.   Dan Jamison, of the FERS Guide had great commentary in his May 8 newsletter – if you don’t receive it please sign up.   Allow me to share some of my own opinion on this matter.    The most recent effort to change things was led by OPM Director Jeff Pon, who took office as OPM Director on March 12, 2018; he subsequently sent a letter dated May 4, 2018, to outgoing Speaker of the House of Representatives Paul Ryan, in which he proposed numerous cuts and changes to our retirement system.  It appears that current employees will not be affected, but that is not for certain.   I have spent the last two weeks researching this topic and the following are my preliminary observations:

1.  Our retirement system (FERS, TSP, etc) is codified into federal law, Title 5 of the United States Code, and in other areas.   To change this, Congress would have to do it themselves.  The OPM Director can “want” but Congress has to “do”.
2. It is not known or clear if the President himself can issue a unilateral directive and “make this happen”.   Executive Orders cannot reverse what is already written into law.  See #1
3. To change federal law, a bill must be formally introduced.  This has yet to happen.  Most bills fail.
4. Mr. Ponn’s letter includes proposals, nothing more.
5. “Bipartisan Opposition” exists to these proposals per this article
6. Mid-Term Congressional elections are in November 2018.  Nobody is taking any action on this topic any time soon.

I also watched Mr. Ponn speak on video, at this video link here:

https://www.youtube.com/watch?v=9Isg36U8YbU

In this video, at timestamp 22:26 he states that the government spends $8.1 Billion in retirement every month, then at 22:42 he states that the government spends $81 Billion (eighty-one).  It is unknown how 8.1 became 81.  He also said 200 Billion at first, then said 200 million.  He also testified May 16 at the GOP House Oversight Committee, video link here:

Check time stamp 55:06 where Representative Elijah Eugene Cummings provides feedback regarding the proposals.

In sum:  Back to regular programming.  As of today, no changes have occurred.

Lets move forward to what is impacting our TSP, the primary component of our aforementioned retirement system.

The general economy continues to perform strongly, a key indicator of economic health is unemployment data, and April’s report reflects that the unemployment rate continues to get smaller, currently at 3.9%.  See graphic:

A touch of inflation indeed exists, however this is mostly fuel/oil driven- the price of gasoline impacts our pocketbooks, it is doubtful that as gas prices rise 10%, that anyone got a 10% pay raise, hence the inflationary effect, but most other categories remain stable, as measured by the Consumer Price Index.  The most recent CPI data release is reflected by the below graphic:

The price of Gold, the world’s safe-haven currency, is at the lowest price it has ever been for all of 2018, reflecting the world’s appetite for buying equities/stock and refraining from investing in metals, a general indication in major institutional investor’s confidence in the world stock markets.

Note that I remain C-Fund and S-Fund, with no international exposure.  The I-Fund has done well, but only marginally better than our domestic US stocks, and my personal stance is we may end up seeing 2018 year-end performance with the US stocks outperforming international stocks.   Important to note is that the Federal Retirement Thrift Investment Board elected in November 2017 to change I-Fund investments.  Basically, the I-Fund will stop tracking the MSCI EAFE Index, and instead track the MSCI ACWI ex USA Investable Market Index.  In “english” this means that more countries are in the I-Fund, but why fix what is not broken ?   I disagree with the FRTIB’s decision to do this. My opinion is that spreading your investment amongst additional holdings results in diluted returns.   Let’s take a look at the current, and future I-Fund:

The new I-Fund will have Brazil, China, India, Indonesia, South Korea, Taiwan, Thailand.  Which is great and seems like “more opportunity” to invest, until you realize with the exception of PetroBras/Brazil (gas), Alibaba (China), Samsung (South Korea), not much exists to invest in.  Not sure what major company exists in Indonesia or Thailand.   The FRTIB likely reviewed this decision closely, however I subscribe to the “if it is not broken, don’t fix it theory”, and subsequently think we will see lesser returns into the future.

That is all I have for now.  Not much “stock market talk” but there really is nothing earth shattering to report on that front.  May is a down month historically, don’t loose much sleep if the markets go down this month.  A lot of tariff talk is out there, China apparently will be buying more US goods and seeking to rebuild trade relationships with the US.   North Korea seems to want to come to the table and work with, not against, the US and free world, and thus pave a new way forward for their country.  So we have a lot of things going on which could positively impact the markets, and our TSP.    As stated before, my allocation remains 50% C-Fund and 50% S-Fund.

Thanks for reading and please continue to share my emails and website updates with your colleagues and coworkers.   The positive feedback is overwhelming, I really appreciate the kind words and compliments, and am pleased that this site has raised awareness and enhanced the knowledge of literally thousands of TSP participants, in regards to the stock market and its direct impact on the TSP.

Have a great week ahead and talk to you in a few weeks.

-Bill Pritchard

Hello Everybody-

Bottom Line Up Front:  My TSP Allocation/Contributions remain 50% C-Fund and 50% S-Fund.   NOTE:  The I-Fund may outperform one or both US based stock funds this month, however my personal preference is to remain US-focused for now.

My last post, 30 days ago, discussed the volatility in the markets and how the markets are mostly reactive to non-economic events.  Panic and fear seemed to be the rule of the day.  Unfortunately, practically nothing has changed since that post, hence this somewhat delayed “update” 30 days later.  I was hungrily waiting for a new event, a new development, to catapult things in a new direction.   Nothing, to include my TSP allocation, has changed since my last post.  The following events have occurred, all causing varying degrees of fear and panic and subsequent volatility:

March-13:  Chief Economic Advisor to President Trump, Gary Cohn (former Goldman Sachs) resigns.  Cohn was of the anti-impose-tariffs mindset.  He did not want tariffs on China.  Cohn was replaced by Larry Kudlow, thus mitigating some Wall Street acid reflux over Cohn’s departure.  Same date: last day for Secretary of State Rex Tillerson.

March-20,21:  Federal Open Market Committee (FOMC) convenes.   We later learn that three rate hikes could occur in 2018 and that the FOMC believes the economy is doing very well.

March-23:  Tariffs “take effect” this day, having been publicly discussed weeks prior.

April-9:  National Security Advisor McMaster leaves office

April-11:  House Speaker Ryan announces that 2018 will be his last year as member of House.  Ryan was an anti-deficit, reign in government spending guy.

April-13:  Military action by US, UK, French forces with 105 bombs dropped on Syria.

Can anyone blame Mr. Market for having some indigestion lately?  Let’s take a look at recent market action as I make my case for my continued equity/stock exposure.  To be clear:  I do not see the G-Fund in my near future at all.  Let’s talk about this….

Note that the SP-500 Index, my “default market thermometer” has been so volatile that this update will use “Close Only Prices” (the price of the index when the market closed).  This will remove the intra-day price swings from the chart and give a (somewhat) clearer picture of the action.   Chart below:

You will see that short-term (going back a few weeks), the “overhead resistance” is 2675, while longer term overhead resistance is 2800.   Operationally, this means when you watch CNBC’s ticker symbols, if it closes above 2675, that is great, however save your celebration as we need it to close above 2800.   Note that “support” is located at 2575.   We do not want any closes below this level.  As I have said earlier, the Dow Jones is only 30 stocks (mostly larger industrial-oriented companies aka oil/gas, construction equipment, etc) and they do not necessarily represent the entire stock market.  The business media likes the Dow because triple digit point swings make great headlines.

A positive observation is that volume has been subdued (mostly) for the last few weeks.  Indeed, whipsaws and swings have occurred, but volume is the “powder” behind the shot, low volume typically reflects weak moves which may not last.  Heavy volume is typically associated with large hedge funds, mutual funds, TSP/State Retirement plans, who are buying large positions.   When the volume is below average, especially on a sell-off/down day, it can be concluded that the “Smart Money” is hanging tight.   See article:    https://www.investors.com/how-to-invest/investors-corner/how-to-spot-institutional-accumulation/

To continue my dissertation, let’s take a look at Gold Prices.   I have said in numerous prior postings that many consider Gold to be a “safe-haven” investment. 

With that said, Gold has basically been flat for the last 30 days.  It spiked somewhat when Syria was bombed, but rolled over and went back down in the next trading session.   See chart:

Visible is that Gold has traded between $1,310 to $1,360 an ounce.   Note we already made the observation that the stock market volume has been below average, meaning the “smart money” has not left stocks.   If they did (and if my theory was not correct) you would see (or probably would see it) show up in Gold.   However gold prices are fairly tame and subdued.   “Nothing to see here….”

Recently some attention has been given to the 10-year Treasury Yield.   This tends to go up when inflation is feared.   The financial press is calling the 3% level a key psychological area.   3% yield or higher and we could witness the stock market going down, how much is anybody’s guess, largely due to black box trading computers which may be programmed to sell if 3% is attained.   The current yield remains below 3%:

The next event/date that I will be watching is the International Monetary Fund (IMF) World Economic Outlook release on April-17.  Expect to see tariffs, inflation, and the global economy to be the key themes.   The IMF is a good “second set of eyes” beyond our own federal government published data and documents, such as the FOMC, Bureau of Labor Statistics, Dept. of the Treasury.   It will be interesting what observations the IMF has on April-17.

As stated earlier, my TSP Allocation/Contributions remain 50% C-Fund and 50% S-Fund.    Expect another update in the coming weeks, however if there is nothing to report, then there is nothing to report.   Let’s hope that the market turbulence subsides and a renewed uptrend commences.

Thank you for reading.  I appreciate all the emails and messages, which rightfully tend to increase when the market volatility increases.   My updates often reflect recent questions sent to me, I believe I have touched on most of them on this update.   Please continue to share this site with your friends and coworkers, and keep Dan Jamison (The FERS Guide) in mind for the benefits and FERS system questions you may have.

Thank you again and talk to you soon !

-Bill Pritchard

Hello Folks

Bottom Line Up Front:  My TSP Allocation/Contributions remain 50% C-Fund and 50% S-Fund.

The month of February, historically the flattest month of the year, is thankfully behind us.   The markets witnessed increased volatility, with the VIX (Volatility Index) seeing drastic swings during the first two weeks of the month.  See chart:

Since mid-February, volatility has returned downward to “calmer levels” however the markets remain very sensitive to news out of Washington DC and to any policy/leadership changes in the agencies.   This, in addition to interest rate hikes, and inflation data, seem to be what sets the market’s mood for the day.   Before digging deeper, lets take a look at TSP returns for February.  Note that (as stated above), I am 50% C-Fund, and 50% S-fund.  I am not currently in the I-Fund, as I foresee the dollar eventually getting stronger, in response to a “bring business back to America stance”, the effect of which will admittedly not happen overnight, and independent of that, due to my belief that the US business climate is arguably operating in the strongest pro-business federal administration in history.  This will eventually help share prices of US equities as tax and regulatory reform benefit American business.    What you do with your TSP, is your business, if you are in the I-Fund, my opinion is nothing is “wrong” with that, however I am not in the I-Fund, for the reasons outlined above.

You will see that “Year to Date” (YTD) data reflects that the C-Fund is the only fund with a positive return, YTD.  Note that in February, all funds were negative, with the I-Fund being the worst performing of all.

However one-month returns do not make for a long-term behavior pattern, indeed they are part of it, but one bad month does not make for  a bad year.   Note that February is historically the flattest month (Dow Jones Index) during the year.   See chart (I have posted this before but recent subscribers have not seen this):

With that said, let’s do a short opinion-based overview of recent market action, and some of the causal factors.    Allow me to insert a chart of the SP 500 Index to get started:

The markets had a huge sell-off in early February (discussed in prior posts) and then remained mostly flat the rest of the month (in accordance with historical behavior).   On February 14, Core CPI data was released, an important inflation measure, coming in at 1.8%, a the same level it was at in Jan 2018, December 2017, and basically unchanged all the way back to April 2017.   Recent Core PCE Inflation data reflects no increase over past reporting periods.  All of this is resulting in fuddled economists asking why inflation has not creeped higher.  Some believe the FOMC may raise rates two or three times, versus four times, this year, as a result of the pacified inflation data.

On February 27, new FOMC Chairman Jerome Powell spoke for the first time to Congress, sharing his view that the economy is performing well.   If you wish to watch the three-hour video, the link is here:  https://www.c-span.org/video/?440903-1/federal-reserve-chair-powell-testifies-monetary-policy-economy

On March 1, President Trump publicly discussed trade tariffs for the first time, sending the Dow Jones index down 420 points, a “panic response” with no clear data or reason for worry.   On March 8, tariff paperwork was signed by President Trump, with the date of March 23 being the date they “take effect.”   A strong positive for the economy was observed on March 9, with “revised payroll numbers” showing that the economy gained 313,000 jobs in February, not 222,000 jobs as estimated.  This 41% improvement in job activity resulted in a positive day in the markets.

As we approach mid-March, my observations are that additional distribution (sell-off days) have indeed occurred on the indexes but that volume is below average, which eases my worry somewhat.   As seen on the SP 500 chart above, 2800 remains the overhead resistance level.   The index remains above its 50-day moving average, a useful tool to identify the trend.

Summary:  My TSP allocation/contribution remains 50% C-Fund and 50% S-Fund.  The month of February, consistent with prior years, gave us minimal returns.   Entering March, we have seen some sell-off days but nothing (for now) has me greatly concerned.

Thanks for reading.  Please share my site, and retired FBI Special Agent Dan Jamison’s site, The FERS Guide  , with your friends and colleagues.  I often get questions in regards to benefits, retirement calculations, “perfect age to collect social security”, and other stuff, and those are outside of my wheelhouse.   Keeping my finger on the pulse of the market (which directly impacts the TSP funds) is hard enough as it is.   For those questions, please reach out to Dan Jamison, who is fluent and the expert in such matters.

Thanks again and talk to you soon…

-Bill Pritchard

Hello Everybody

Note:  My TSP Allocation/Contribution remains unchanged.  I am closely watching things and yes, my fingers are closer to the G-Fund button than they were before, however I have changed nothing.

The last two weeks have been quite turbulent.  We witnessed thousand point swings on the Dow Jones index, panicky financial headlines and fear mongering by the press, and more importantly, account balances and portfolios being damaged.   Bloomberg Press recently published an article mentioning how the reason behind the selloff is not identified:

Indeed, depending on what channel you watch or which expert you listen to, the theories abound.  I would not get too wrapped up in theory but instead stick to objective, identifiable market behavior and economic data.  The markets indeed went down, that is undisputed.  Allow me to share my opinions on things and it should become apparent why my comfort level is still (mostly) unshaken.

Let’s begin our discussion with the idea, shared by most on Wall Street, that a “Correction” is a 10% minimum decline (from a peak, or high) in an index.  Also lets identify that a “Bear Market” represents a 20% minimum decline, and is also reflective of a new, sustained, downward direction in the markets.   Bear Markets typically last six months to 2 years, Corrections typically last anywhere from one to 12 weeks.  Recent volatility requires tightening up the seat belt and putting the tray tables up, but occasional turbulence is not abnormal.  “Are you telling us that 1,000 point swings in the Dow is normal?”  No, I am not, but as I discussed in my prior post, look at daily percentage losses, not point swings.  Also, keep in mind the Dow is 30 stocks.  Do 30 stocks represent the entire stock market, and health of the economy ?   In my opinion no.

Surprisingly, if you use “Close Only” prices which eliminates intra-day volatility, no indexes are currently in correction territory.   The NASDAQ got close, but never entered it, and the SP-500 and Dow (both containing large cap stocks) touched it briefly but exited on Friday, Feb-9.   Many feel that “closing prices” better represent sentiment, as that was the last price before traders went home for the day.  In my charts, the 10%/Correction level is a horizontal blue line.  The 20%/Bear Market level is a horizontal red line.   Lets look at all three indexes:

Theories aside, my opinion as to why this is happening is:

1. 10-Year Treasury Yields reaching 3% Level
2. Fears of interest rate hikes by FOMC
3. Concerns about inflation

Lets take a look at the Treasury Yield chart, indeed it is on a steady climb.  Many believe that 3% is an important psychological level.  Yields above this fuel fears of interest rate hikes by the FOMC, who will meet in March.

Under new FOMC leadership, a new metric may be used, but under prior FOMC Chairperson Janet Yellen, the FOMC has used 2% PCE Inflation as the trigger point to consider raising rates.  This is discussed in my March 11, 2015 post here.

It should be noted that when inflation is feared, and when stocks go down (dare I say in a “bonafide move down”), Gold Prices (Gold=Inflation hedge and safe haven currency) typically will go up.  This has not happened, while ostensibly the world is crashing around us.   Let’s take a look at the Gold chart since February:

Recall that the FOMC’s preferred measure of inflation is the PCE, not CPI, although the CPI does provide inflation related information.  The next release of CPI data will occur on Feb-14 (Happy Valentines Day…).   Again, the FOMC prefers PCE data.   CPI Chart below, most recent data reflects a CPI of 1.8%.  Ideally it retreats to 1.6% or 1.7% on Valentine’s Day release.  Note that leading up to the recent Bear Markets (sustained downtrends) in  the last 20 years, the Core CPI exceeded 2.25% on  a multi-month, consecutive basis.  We are not there.

Recently we have had panic and negativity, let me introduce some optimism.   Based on my analysis of things, my opinion is a Bear Market (an extended and sustained period of damage) is not immediately ahead.  Yes, we touched correction territory.  The US business environment has arguably never been healthier, and with reforms and tax cuts (Note:  Tax cuts indeed reduce revenue to pay our financial obligations and impact our US Dollar, that is another topic…) will serve to benefit the stock market.    Since 1950, seven out of nine Bear Markets occurred in a recession. Recession is a bad thing, think about foreclosed homes, unemployed people, and lost jobs.  We are not in a recession.

To quickly touch on recent action, Friday Feb-9 witnessed the markets closing strongly up, with Investor’s Business Daily reporting this as “Rally Attempt Day-1.”  This is an important concept, typically after four rally attempts, the market will begin a new uptrend and enter a new bullish phase.  Coincidentally, the dates so happen to line up that Day-4 (if it rallies every day) will be Feb-14, the same day that CPI is released (in the AM).

Some inquired about my comment from my prior post, regarding the indexes below their 50-day Moving Average.  Indeed, this is not preferred, but this just means that “there is work to do”, time to deep-dig analysis on economic data, stock charts, and other information, before any drastic decisions are made.

As a result of the above, my TSP Allocation remains unchanged.   Let’s see how this week plays out, CPI on Feb-14 indeed will be something to watch.

Thanks for reading, talk to you in another week or two.

-Bill Pritchard

Hello Folks

Bottom Line Up Front:  My TSP Allocation/Contribution remains unchanged.

Most know that the Dow Jones index closed down 665 points on Friday February-2.   This prompted quite a few folks reaching out to me and asking if I was worried, and “why didn’t I see this coming.”   Most panic and emotionally fueled market days are impossible to “predict”, I can’t control if someone screams fire and everyone runs for the exits.   However my methodologies indeed include pro-active smoke detection systems, room temperature changes, visual checks of the structure, and my conclusion is that nothing is burning and nothing is on fire.  In 2018 we indeed have some conditions which will require that we remain vigilant and alert, but for now  I am staying where I am at.  Let’s take a closer look via my opinion based analysis….

A couple of potentially negative things exist in “the background” right now:

1. FOMC Chairperson hand off, Janet Yellen passing the baton to new chief, Jerome Powell.  Yellen’s last day was Friday.
2. Never-ending political turmoil at seemingly all levels.
3. Expected interest rate hikes in March 2018 (FOMC Meeting March 20-21).  This is the leading cause of heartburn in markets.
4. Some major Dow and S&P index components reporting less than expected quarterly earnings.
5. Depending on who you ask, an “overextended bull market.”  Others, myself included, believe we may be entering a new uptrend phase and we may see another 1-3 years of gains.
6. Weak US Dollar.

Now, some positive:

1.  The Dow Jones loss on Friday represents a 2.5% negative performance.  Point loss was big, percentage loss was not.  In comparison, the Dow Jones lost 22% in one day during the famous 1987 market crash.  Percentage-wise, the loss on Friday, while not desired, was not a big deal.
2. SP-500 Index had its best January one month return since 1997.
3. January “sets the tone” for the rest of the year, 95% of the time (chart below).
4. All indexes above their 50-Day moving averages.
5. Sell-off volume was not hugely above average levels.

Lets talk about the above points some more.  I will not hit on every one, as most are already self-explanatory, but some need elaboration.  Lets start with the chart of the January’s of prior years.  This chart is from Jeff Hirsch, of the Almanac Investor.  I happened to meet Jeff in person at a Dallas,TX investment meeting two weeks ago; I asked him a couple of questions- turns out he and I both share similar bullish views about 2018.  He is a cool guy and knows his stuff.  The red strike-thru is my edit, as the graphic was last updated on January 26.

Going back to 1950, a strong January sets the tone for the remainder of the year at an approximately 95% success rate.

We indeed had some big name, major, companies report less than expected quarterly earnings.   Google recently reported that their Cloud Platform revenue is way behind expectations, competitor Amazon, with a similar cloud platform, is outperforming revenue-wise Google 5 times.   Google is a MAJOR NASDAQ stock and this dragged things down.  Apple, another major stock, is seeing lackluster Iphone-X sales.  If you didn’t know, the Iphone-X is not much (if at all, unless you are a Mac Addict and Iphone nerd) different from the Iphone-8.   Apparently, the millennial generation (well, probably everyone….) has some heartburn paying $1000 for a Iphone-X (43% costlier) that offers enhancements and improvements over the Iphone-8 of basically zero.   The press and analysts are questioning Apple’s business decision, and the stock is down.  (This is not an Iphone review, so…)

Let’s take a look at some charts:

You will see that the SP 500 index is indeed “overextended some”, a term popular with the financial media, describing when the index departs from its 50-day moving average and other trend-lines.   Note that it still remains above the 50-day, which is approximately 2730.   2730 is an important level.  Any close below 2730 is cause for some alarm.   

In regards to the weak US Dollar and its impact on stocks, ask 20 economists about this and you will get 20 answers.  The theory that “a weak dollar makes international stocks go up” is questionable.  Many believe the weak dollar is a result of international stocks moving higher first, as money goes into overseas investments and non-dollar currencies, causing the dollar to fall.   “Moving to I-Fund because the dollar is weak” probably should be opened up a little more to include consideration of other factors.  My opinion.  Just remember the dollar is a currency, the stock funds are stocks, two different animals.  Keep in mind the world markets are just that:  global in nature.  Toyota (Japan), Samsung (South Korea), Airbus (France), have factories and subcontractors all over the world, and sell to customers all over the world.   The “Japanese” Nissan Titan pickup truck ?  Built in America and sold in America.  Korean Samsung TVs?  Sold in Mexico.  If Toyota Camry’s suddenly fell apart after 1 week of ownership or had a series of gas tank explosions, Toyota stock would go down, weak dollar or not.  Toyota is a Japanese company- Japanese stocks represent 24% of the MSCI-EAFE Index, which is what the I-Fund is based on.  The point here is that the US Dollar, alone and by itself, is not what causes the I-Fund to move up or down, in my view.  Strong Corporate/company performance, quality products, and solving problems are typically the companies whose stock prices go up, no matter what country the HQ is located in.  Some have different interpretations and view things via a different lens, that is fine, I am sharing my opinion, nothing more.

If interest rates rise this year, the US Dollar is expected to recover.   Also, Mr. Trump’s approach of de-regulation, tax reform, and bringing business back to US soil is an approach never seen in history; the resulting effect on the US Dollar is not known, nor will it be seen for 6-12 months.  In basic terms, the US Dollar weakness is probably attributed to the belief that tax reform will result in reduced tax revenue to pay for government programs and financial obligations, thus impacting our economic health as a nation, and it is also weak due to investment taking place overseas.  Money leaves US stocks and currencies (USD) and goes elsewhere, in pursuit of higher returns, especially in China.  China, the world’s factory, does pretty good when the world is doing good.   In the end, our American Greenback has fallen in value.  I am not running a FOREX site or economic think-tank (both are beyond my expertise) so I will stop there.

The main driver, in my opinion, of market panic is the expected interest rate hikes.  However I believe that the multiple efforts by the current administration, on all fronts, to stimulate business growth and effect tax reforms, will mute any negative impact that rising rates will have.

In summary, let’s monitor things but I see last week’s action as panic driven.   I also feel we are in a never-seen-before environment of pro-business politicians, tax reform, and de-regulation.  All economic indicators appear positive.  I feel very confident about 2018.   Let’s keep an eye on SP-500 level of 2730, any close below that, well maybe multiple closes, and I will start to stay up at night.

My TSP Allocation/Contributions remain unchanged.

Thanks for reading….talk to you soon….

-Bill Pritchard

Good Evening Everybody

I have received quite a few messages in regards to how the government shutdown will impact the TSP and the market.  As we know, TSP performance is largely dependent on the US stock markets.  It is my opinion that there will be minimal negative market impact.

Going back 20 years, we have had three shutdowns:

1. Sept-30 to Oct-17, 2013
2. Dec-15 1995 to Jan-6, 1996
3. Nov-14 to Nov-19, 1995

The 2013 shutdown witnessed a slight hiccup in the markets, although it is not known if this was indeed triggered by the shutdown.  The markets rallied the rest of the year, resulting in my conclusion that the 2013 shutdown had little impact on the stock markets.   The “background action” included a strong, uptrending stock market.  See chart:

It should be noted that the 1995/1996 shutdown witnessed the NASDAQ (flashback to AOL, NetScape, AskJeeves) bull market in it’s infancy, and had absolutely no negative impact to the markets.  See chart:

Like today, these shutdowns were due to the inability to reach agreements, and like today, in the “background” existed a strong and healthy stock market.

As we sit today, 2018, the market is arguably healthier than it has ever been.   We are arriving to another shutdown scenario, however based on historical behavior (nothing is guaranteed, but history tends to repeat…), and the strong market in the background, I expect minimal negative market impact.   Note that Monday and Friday tend to be “emotional days”, we may see some panic selling, the world-is-ending, action on Monday.  It is my opinion that this should be disregarded (if it even happens) and instead let’s allow the market to find its footing later in the week.

Please anticipate another post at the end of the month, or early February, discussing January 2018 market action, as the markets “set the tone” for the rest of the year.  All the stock funds are doing well, we are very fortunate.   If your choice is international exposure, domestic large caps, or domestic small caps, whatever your preference, you are being rewarded.   The year has begun very well.

Thank you and take care

-Bill Pritchard