This has been one of the most historic stock market crashes in over a hundred years of data. The U.S. large cap stock market, tracked by the C Fund, is about 30% down from all-time highs in record time, while foreign equities, commodities, and other asset classes have been slammed as well.
Here is how the various TSP funds have performed year-to-date:
The bond funds retained most or all of their value while the equity funds are down significantly, including about -29% for the C Fund, -32% for the I Fund, and -37% for the S Fund.
The G Fund held up the best year-to-date, but going forward, its prospect are concerning. In response to the crisis, the U.S. Federal Reserve cut short-term interest rates to near-zero. The G Fund determines its interest rate from longer-dated Treasury securities, with the 10-year Treasury note being the closest approximation.
The 10-year Treasury note currently pays less than 1%, which is below the U.S. Federal Reserve’s 2% annual inflation target. This yield is generally determined by market forces, but now the U.S. Federal Reserve is also expanding the monetary base to buy 10-year Treasury notes as well, potentially affecting their yields.
This chart shows the 10-year Treasury note rate over time:
The Fiscal Reality
Overall, this is a complicated financial situation. The United States normally reduces its fiscal deficits during economic booms and relies on more aggressive deficit spending during recessions.
However, this time, the United States entered this crisis with massive structural $1 trillion deficits already in place (approximately 5% of GDP) during good times, up from less than $500 billion in annual deficits in 2015.
With fiscal stimulus bills in Congress being proposed that are looking to be over $2 trillion, on top of the $1+ trillion structural deficit we already have in place, it looks as though the U.S. fiscal deficit may reach $3 trillion this year, or approximately 15% of GDP. If so, that would be the largest annual deficit as a percentage of GDP since World War II.
At the moment, the U.S. Federal Reserve is expanding the monetary base to buy that debt and finance U.S. fiscal deficits. After years of holding their balance sheet flat and even trying to reduce it, they are now expanding it at a record pace to monetize hundreds of billions of dollars in new debt over the past few weeks alone:
In time, we will get through this problem and resume economic activity. It remains to be seen how quickly Americans will be able to get back to work, especially considering how much leverage is being threatened in the system.
The best we can do is stay safe and follow appropriate directions for social distancing and virus control. Federal employees and retirees are generally fortunate to have steady income streams during this crisis, and folks can do what they are able in order to help people around them so we can collectively pull through.