TSP

Beijing, China - June 2019: A boy sits on a bench shaped like a missile painted with the US flag outside of a clothing store at a shopping mall in Beijing. President Donald Trump and Chinese President Xi Jinping agreed to a new cease-fire Saturday in a yearlong trade war during their meeting on the sidelines of a conference in Japan, averting, at least for now, an escalation feared by financial markets and the business community while negotiations continue.

Lyn Alden

June was a strong month for all funds within the TSP.

For the bond funds, the G Fund rose by a bit under 0.2% while the F Fund rose by over 1.2%. Equity funds had stronger returns, with the C Fund up 7.0%, the S Fund up 6.8%, and the I Fund up 5.9%.

Much of this strong equity performance for the calendar month was due to timing. Domestic and foreign markets had a big slump through May and a reversal in June, and the pivot occurred right at the beginning of the month. For example, here is a chart of the S&P 500, which the C Fund tracks:

Chart Source: Google Finance

Federal Reserve Bank Stress Test Results

Each year in June, the U.S. Federal Reserve performs a stress test on all of the major banks in the country to comply with the 2010 Dodd-Frank Act. The goal is to simulate a major recession similar in size and scope to what occurred in 2008, and to see if the banks have high enough capital ratios and risk controls to survive through that type of environment. Regulations were loosened a bit for smaller banks and custodian banks in a 2018 revision.

This year, all banks passed the test, and are therefore allowed to increase dividends and share repurchases to their shareholders. Capital One and J.P. Morgan were judged to have cut it rather close, with expected capital reserves coming down nearly to the allowed threshold in a severe recession. The only bank that received a warning was the U.S. division of Credit Suisse, which has high reserves but is required to submit a revised capital plan. No banks outright failed the test, and the banking sector saw a significant jump in stock prices towards the end of the week as many large banks announced higher dividend payouts and share repurchase authorizations.

Trump-Xi G20 Meeting

The other significant news this week was that President Trump and President Xi of China met at the G20 summit in Japan to discuss stalled trade talks.

In recent months, trade talks between the two nations had broken down, and the U.S. began imposing restrictions that would potentially halt U.S. tech companies from selling products to Huawei, one of China’s biggest tech companies.

Many U.S. semiconductor stocks have been performing poorly lately, because a large portion (over half in many cases) of their revenue comes from selling their products to China including up to 5-10% to Huawei in some cases. China does not yet have the capability to make many types of advanced semiconductor chips that their businesses require.

The reported results of the Trump-Xi meeting were that the U.S. and China would resume trade talks, that the U.S. would not escalate tariffs currently, and that the U.S. would ease restrictions on Huawei, which could boost U.S. semiconductor stocks as well as Huawei itself.

This truce could lift a cloud of uncertainty that has been hanging over the stock market, although the ongoing trade dispute is by no means resolved.

Additionally, both sides had given remarks prior to meeting implying that this truce may occur, so the market was likely already pricing in a constructive outcome for the aforementioned stock sectors that have been under pressure lately.