fedweek.com | low volatility for TSP in June, Brexit and the I Fund

By: Lyn Alden

With one week left in June, this is shaping up to be a very low volatility month for the TSP. However, investors should take a cautious approach in light of high share prices and an increasingly drawn out economic expansion.

The G Fund is up 0.1% so far this month, while the F Fund is substantially up about 0.5%. The C Fund is up about 1.2%, and has had very little fluctuation, as it has remained between $33.50 and $34.20 per share. The small-cap S Fund is June’s biggest gainer so far, with a 2.3% increase over this three-week period. The I Fund has had the lowest volatility out of the equity indices this far into the month, with a very narrow share price range and an overall gain of less than 0.1% since the beginning of June.

All in all, the TSP’s volatility is extremely low across all funds, and the gains are positive.

In fact, as measured by the CBOE Volatility Index, which has been a principle measure of implied volatility since 1993, the S&P 500 is sitting near record low volatility:

fedweek.com | TSP volatility low in June

Source: CBOE Volatility Index, Retrieved from the St. Louis Federal Reserve

It’s important not to make the mistake of being enticed by the low volatility and high share prices to over-invest in the C Fund, or equities in general. Investors commonly sell stocks during market bottoms when bad news is everywhere, and buy stocks when they’re already highly priced relative to earnings and good news is everywhere, which results in poor returns.

At a time of very high market valuations, and 8 years into a continued economic expansion, this is not the time to overweight equities. It’s a good time to stick to a balanced portfolio, with some exposure to the G Fund and F Fund along with the equity funds. Historically, volatility does not generally stay this low for very long, and it’s good to be diversified.
Top Money News for June

The U.S. Federal Reserve raised interest rates by 0.25% this month, which is the third raise since December. This rate now rests at 1.00-1.25%, and sets a higher foundation for interest rates of other types of loans, including mortgages and bonds. These slow, gradual rate increases should have a beneficial effect on the G Fund and F Fund over the long-term, because they’re not sharp enough increases to really pull down the price of bonds, but nonetheless over time should result in higher interest rates and returns. The Federal Reserve also reduced their forecasted inflation rate for the remainder of the year to just 1.6%.

Brexit Could Impact I Fund

The UK held a snap general election this month. Although the next election was not due until 2020, Prime Minister Theresa May called for an optional election, hoping to increase her Conservative Party’s existing majority of Parliament and therefore strengthen her hand for Brexit negotiations. Instead, May’s gamble went against her, and her party lost their majority position in Parliament by a small margin. Britain is now entering negotiations with the rest of Europe to exit the European Union under a less certain UK political climate.

The UK currently makes up almost 18% of the I Fund, and Germany and France together make up another 20%, so how smooth the exit process goes could impact future I Fund returns and volatility.

Oil Price Drop Mixed Bag for Investors

Global oil prices are falling again, with the price of crude dropping by 10% in just the past three weeks. It’s a benefit to consumers, but a mixed bag for the markets.

Here’s the 10-year price history of oil, courtesy of Nasdaq:

FEDweek.com | nasdaq oil price history

Source: Nasdaq

Due to supply outpacing demand, oil prices dropped sharply from over $100/barrel to under $40 during 2014 and 2015, which caused increased volatility in the markets during that period, and resulted in the share price crash of many oil-related companies. Oil prices slightly recovered to over $57 at the beginning of this year, but have since slid down to $43, with an acceleration of oil price declines in June. If this continues, it could affect overall S&P 500 volatility as it did previously.

If you happen to have investments outside of the TSP, such as in an IRA or other brokerage account, this drop in oil prices may present another round of buying opportunities. For example, in 2015, some companies like Magellan Midstream Partners LP, that make their profits by transporting oil rather than supplying oil, had big share price reductions even though they had limited financial exposure to changes in oil prices. Value investors that bought up low-price shares of various healthy and energy companies that are not not over-leveraged fared well, as prices stabilized and companies that had little commodity exposure continued to be profitable.

Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.