All of the TSP equity funds moved higher during this past week, as investors embraced a more risk-on outlook. The V-shaped recovery in the S&P 500 (which represents about 80% of the U.S. stock market in terms of capitalization and is tracked by the C Fund) has been particularly aggressive:
In particular, value stocks and other stocks outside of the top few mega-caps have had big gains in the past 2-3 weeks. Back in April and again in May, I highlighted how concentrated the S&P 500 and C Fund had become, with the top 5 names alone accounting for over 20% of the 500-stock index’s value.
Since then, we’ve had a partial reversion to mean, with many of the other 495 stocks catching up somewhat with the top 5. This next chart shows the ratio between an equal-weight version of the S&P 500 and a market-weight version of the S&P 500:
Whenever that purple line is going lower, it means the S&P 500 is becoming more concentrated, with the top few stocks outperforming the broader index. Whenever it is going higher, it means it is becoming less concentrated, with an equal-weight index outperforming the market version that is heavily concentrated into the top several mega-cap stocks.
After that ratio dropped to extreme lows in March and April, it has started to significantly recover in late May and early June, meaning there is more breadth or participation in the market rather than just a few top stocks holding up.
In addition to the C Fund becoming slightly less concentrated, the S Fund and I Fund have outpaced the C Fund to the upside since mid-May, after their long stretch of underperformance up to that point. This has been a big reflationary shift to the upside.
A jobs report that came out on Friday showed that, contrary to consensus economist expectations for more job losses, May saw an uptick in total jobs compared to April:
The employment situation remains disastrous by historical standards, but many investors saw this as a sign of a fast recovery in jobs.
However, the Bureau of Labor Statistics noted that they had a probable error in their report, in the sense that many employees who are absent-but-paid (significantly in part due to the federal government’s PPP loan program to keep more employees on payrolls through the end of June) were counted as employed but should have been counted as unemployed. They estimated that the current unemployment rate is 13.3% (down from a high of 14.7% in April), but is likely over 16% if counted properly.
If we look at the weekly situation in initial jobless claims and continued jobless claims, the recent pattern has held steady, with a sideways trend in 20+ million continued jobless claims, with high-but-slowing initial weekly claims:
So, people continue to lose jobs, but some people are getting jobs back, and there continues to be a lot of “churn” in the job market. There are early signs of recovery and a potential top in joblessness, but investors may wish to be careful when drawing conclusions from the data.
Another thing that TSP investors should be aware of is the fact that there has been an explosion in small investor new-account trading activity. With sports betting and casinos offline for a few months, along with stimulus checks and lack of work, the number of new accounts and the number of new stock and options positions in small accounts has absolutely skyrocketed:
Many investors are making very aggressive bullish bets with call options, and retail investor enthusiasm has reached rather euphoric levels.
This is likely a good time to check your TSP allocation and see where your funds are relative to your target asset allocation. The Lifecycle Funds internally rebalance themselves automatically, but if investors instead hold a different set of individual funds, those do not rebalance automatically. Rather than chase markets, most investors would do well to stick with their process, whatever it may be, by remaining diversified and risk-appropriate for their unique situation.
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.