Santa has been kind to the TSP this year, and December has so far held up to its reputation as a relatively benign and positive month for markets, statistically speaking.
Last week, the S&P 500 which the C Fund tracks ended at new all-time highs and breached 3,200 for the first time.
The small-cap stock index that the S Fund tracks finally reached new all-time highs as well:
The MSCI EAFE index, that the I Fund currently tracks, is still down from its all-time highs from 2007, and below its more recent 2018 highs:
The I Fund’s underperformance is due to a variety of factors including lower equity valuations, slower growth rates, and the fact that the dollar has strengthened against the euro, yen, and many other currencies considerably since those peaks.
Some analysts expect that international stocks are likely to outperform U.S. stocks in the 2020’s decade, and these periods of outperformance do tend to go back and forth over time, but whether that will happen or not is yet to be seen. Investors should keep in mind that maintaining a globally-diversified portfolio can reduce overall volatility and geographic risk.
U.S. equities are becoming increasingly expensive based on most valuation metrics. With interest rates very low, the trade dispute between the United States and China at least on hold for now, and considerable liquidity stimulus from the Federal Reserve in recent months, it has become a “Goldilocks” investing environment.
However, the total valuation of the U.S. stock market has considerably outpaced its normal ratio to U.S. GDP and U.S. broad money supply:
It’s important not to chase returns or modify your investment strategy based on emotion. Whether you’re a buy-and-hold strategic investor, or a tactical investor that moves his or her allocation around, it’s critical to stick to your process or consult with an advisor rather than make moves based on emotion or narratives of the day.
Another key risk is that despite U.S. markets making new all-time highs, economic indicators continue to indicate potential weakness. GDP growth forecasts for this quarter and next are lower than they were a couple years ago, S&P 500 earnings are flat in 2019 compared to 2018, and metrics that measure industrial production, construction spending, and other areas of the economy have been sluggish.
The new year is always a good reminder to consider re-balancing back to your target allocation, and more broadly for re-examining your asset allocation targets to make sure that your risk level is correct for your situation.
Rebalancing is something that the TSP Lifecycle funds to automatically, so that when one sector outperforms and grows, part of that is sold and reinvested in lower performing (cheaper, for now) areas. This forces the investor to sell high and buy low without emotion getting in the way.
Read more on the Pros and Cons of the TSP Lifecycle Funds