The Fed Trader

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

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