Since the beginning of October, the C Fund is down over 8.6%, the S Fund is down 12%, and the I Fund is down over 9.8%. It has been carnage across the equity funds.
Meanwhile for the bond funds, the F Fund is down about 0.3% while the G Fund is up a small fraction of a percent.
Volatility of the U.S. stock market has been in the mid-20’s for much of this month, which is roughly double where it has been over the last several months:
In addition to rising interest rates in the United States affecting the C and S Funds, and Italy’s sovereign debt debate in Europe affecting the I Fund, mixed earnings reports from major companies have contributed to market turmoil this month.
Mixed Earnings Reports
Companies in the C Fund and S Fund are in full earnings season, with most companies reporting how they did over the past three months and forecasting how they expect to do for the remainder of the year.
Amazon and Alphabet (parent company of Google) both reported third quarter earnings that were below analyst expectations, and both issued weaker guidance going forward than analysts expected. Their stock prices dropped substantially in response.
Both companies had substantial growth compared to the same quarter last year, but with Amazon trading at a price-to-earnings ratio of 92, and Alphabet trading at almost 30 times earnings, anything short of spectacular performance is viewed as problematic. These companies are some of the largest components of the C Fund.
Microsoft and Netflix, on the other hand, both reported strong quarterly results. Microsoft’s cloud computer business continues to take off with high growth, while Netflix had growth above expectations but only with the use of growing debt and negative free cash flow to fund that growth.
Caterpillar, the large manufacturer of construction vehicles that is viewed as a bellwether of domestic and global economic activity, reported earnings in line with expectations but gave mildly disappointing guidance for the rest of the year, and said that its costs were rising due to steel tariffs and other factors. The stock had its worst single-day performance in seven years in response.
Texas Instruments, the world’s biggest producer of analog components, reported disappointing guidance, saying that semiconductor demand is weakening. The semiconductor industry has historically been very cyclical, but with increased prevalence of smart phones and data-centers, many analysts believe that the industry is becoming much less cyclical in recent years. This current slump will test that thesis.
The Philadelphia Semiconductor Sector is the primary index to measure stock performance in the industry across all significant semiconductor companies, and it has had a major downward move recently:
The financial sector and the homebuilding industry are both at 52-week lows as well. The homebuilding industry has been among the hardest-hit sectors in recent months:
Overall, it has been rough month for the TSP. As of last week, the C Fund and S Fund are now in negative territory for the calendar year. There are a few things to watch that are coming up that could help revive the market or sink it lower:
-Apple will report earnings after the closing bell on November 1st. As the biggest company in the C Fund, if Apple beats or misses earnings expectations it could noticeably affect market sentiment in general.
-Periods of time shortly before and after midterm elections are historically strong periods for the stock market compared to years without midterm elections. Markets statistically tend to rally in October leading up to the election, and then rally into the early portion of the next year. We haven’t had a rally in October, but it remains to be seen what will happen in the markets during November and December once the dust settles and the results are in.
-Investors are looking forward to a possible meeting between President Trump and President Jinping of China in November. Both countries have had downward stock markets in 2018, and the International Monetary Fund cut the 2019 GDP growth forecasts of both countries earlier this month. The United States is expected to raise tariffs further on China starting in January if the two nations cannot come to a deal, so the markets will be watching that situation unfold.TSP Investment Funds