The C Fund was the big winner in February, outpacing the small-cap stocks of the S Fund and the international stocks of the I Fund.
The TSP’s common stock C fund posted a 3.97 percent gain in February, with the small company stock S fund rising 2.45 percent and the international stock I fund up 1.44 percent. The bond F fund rose 0.71 percent and the government securities G fund gained 0.18 percent. The February gains for the lifecycle L funds were: Income, 0.77 percent; 2020, 1.36; 2030, 1.96; 2040, 2.25; and 2050, 2.51.
The C Fund’s gains may have been due to changing expectations about the domestic economy. As a group, the smaller companies that compose the S Fund have less international exposure than the larger companies in the C Fund. Because of that, their earnings are tied more closely to the state of the US economy.
As it turns out, GDP only grew by about 1.9% in Q4 of 2016, compared to average economist estimates of 2.1%. Small caps might not be getting enough wind in their sails (or earnings) to keep pressing upward.
But keeping things in perspective, it may just be that investors are cooling off on small companies after the huge run up at the end of 2016. Although the small-caps of the S Fund lagged large caps of the C Fund in February, they’re still ahead if we dial the time frame back to November 8, 2016.
Since the presidential election, the C Fund is up about 11.2% compared to the even more impressive 14.8% surge of the S Fund over the same period. The Trump administration’s focus on a possible infrastructure stimulus, healthcare overhaul, and possibly even border taxes may be a more favorable mix towards smaller, domestic-based companies. This led to an initial boost in the S Fund and other small-cap index funds, but now reality may be setting in as the market debates what form those policies might take, and what their chances are for getting through Congress intact.
Even without this specific administration’s approach on things, however, this period of performance follows the larger trend that small stocks perform more strongly in bull markets but fall harder during recessions compared to blue chip stocks. The fact that the C Fund is catching up may mean this bull market is in a late stage.