FEDweek

Outside Forces Could Affect Your TSP Growth in 2017

In another article we looked at potential changes that the Thrift Board might implement in 2017.  This article takes a stab at things that might be generated by outside forces this year.  Predicting an outside initiated change is, of necessity, more speculative than commenting on those that the TSP has already said they will pursue.

There seems to be a consensus among financial writers and others who make predictions about the economy that interest rates will continue to rise.  I guess we all knew that they would have to go up sometime, we just didn’t know when.  A normal consequence of rising interest rates is falling bond prices.  This is likely to have a greater effect on individual bonds, but can depress the value of bond funds (like the TSP’s F fund).

Stocks may face a headwind as well because the cost of borrowing will increase.  When the cost of borrowing increases for an individual, he/she will buy less, slowing demand.  When the cost of borrowing increases for a business it will either borrow less or pay more to borrow, which can decrease profit and perhaps stock prices as well.  Individual stocks can be expected to fluctuate more than the TSP’s stock funds (C, S and I).

So, the G Fund is still safe – right?  I agree that it will still be the safest fund, but it is possible that the return of the G Fund will take a dive, even as the return on individual treasury securities increases.  With Republicans controlling both houses of Congress and the White House, it is now much more likely that the return of the G fund will be changed to that of the underlying short term treasuries in which G fund contributions are invested, rather than the current mid-term treasury rate of return that is required by statute.  In the recently completed session of Congress, the House of Representatives passed legislation that, at the time, would have decreased the G funds return from roughly 2% to around 0.03%.  It didn’t clear the Senate and President Obama would have vetoed it if it hit his desk, but who knows what will happen in this session of Congress.

There are other wild cards as well.  Regardless of your view of the results of the election, I think we can all agree that the victory of Donald Trump was a stunning repudiation of the status quo.  What this means for our investments remains to be seen, though increased volatility is likely.

And then there’s the possibility for a “Black Swan” event; an event that could not have been predicted.  Of course, there’s always such a possibility; think of the 9/11 attacks and their effect on an already staggering stock market.  Let’s hope that we face no such events in 2017.

The above paragraphs represent speculation as to what might happen in 2017.  It is important to note that none of the above events occur in a vacuum, they are likely to be inter-related.  The best you can do is to stay on top of your investments, TSP and otherwise, and make the best decisions you can.