TSP

New York, Dec 2019: A television screen on the floor of the New York Stock Exchange, shows a press announcement in China. After months of waiting, markets had a muted reaction to news Friday that the US and China had reached an initial deal on trade. The I Fund ended up being the best-performing TSP fund of the week.

Lyn Alden

This past week was a big one for global markets, and propelled the S&P 500, which is tracked by the C Fund and represents about 80% of the U.S. stock market capitalization, to new all-time highs:

Chart Source: CNBC

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The biggest domestic news of the week for financial markets was that the United States and China announced an agreement on a “phase 1” trade deal between the two nations.

Not all of the details are public, but it is said to include agricultural purchases by China, a reduction in tariffs from the United States, and a halt to the next layer of U.S. tariffs that were set to start on December 15th. Treasury Secretary Steven Mnuchin said both sides would go over the details and formalize the first phase of the agreement early next year, and then move onto “phase 2” discussions.

The main takeaway for the markets is not necessarily about the details, but about the direction of the rhetoric. This agreement represents a more conciliatory phase in the ongoing trade dispute, rather than an escalation that may have otherwise occurred if the December 15th tariffs went into place.

The Brexit Vote is In

Another news event that was just as important on the global scale was the result of the U.K. general election. This election was unusual, because it was the first U.K. one held in December in almost a century, and was hastily scheduled to give voters a chance to indirectly confirm Brexit, the plan for the U.K. to formally leave the European Union.

During the past year, multiple attempts were made by the U.K. government to reach a deal with the European Union for an organized exit of the U.K. from the union, but none of the plans had strong enough U.K. parliament support to get through all the checks and measures, which resulted in continued uncertainty.

During this election, the Conservative Party ran on the “Get Brexit Done” slogan, and their leader and current prime minster Boris Johnson vowed to quickly finalize Brexit if he won. The result was that their party won a historically large percentage of votes, which drastically increases the probability of a hasty Brexit in 2020.

The pound sterling strengthened against the dollar as the election results became clear, and the I Fund ended up being the best-performing TSP fund of the week, with a surge towards the final two days:

Chart Source: FEDweek

The U.K. is the second-largest market in the I Fund after Japan, and Europe as a whole represents about two-thirds of the I Fund, so any major changes in currencies, markets, or politics in Europe has a large effect on the fund.

Buy the rumor, sell the news

The risk for investors at this point would be a “buy the rumor, sell the news” event, now that the China-USA trade war tensions and U.K. political uncertainty have both been at last somewhat eased. It’s an often-held idea by investors that anticipation builds up towards an event, and when the expected resolution is finally reached, rather than rallying the position higher, investors often sell their positions and take their gains.

It is hard to say if that will happen this time, but investors should be cautious about the pattern of buying into markets when there is an “all clear” and selling whenever there is uncertainty.

Instead, most investors should stick to their long-term investment plans, including appropriate diversification for their age and financial goals.

For many investors, the Lifecycle funds can be ideal investment vehicles because they are consistently diversified and rebalance themselves over time.
More on the Lifecycle funds here: The Pros and Cons of Lifecycle Funds

As a final note, another event that made the headlines this week was that the U.S. financial sector finally recovered from the 2008 subprime mortgage crisis. It took twelve and a half years to do so, but the financial sector of the S&P 500 (and C Fund) has now finally surpassed its previous 2007 highs:

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Chart Source: Google Finance

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.