Ever since the TSP equity funds sold off sharply from late February through mid-March, they’ve been recovering at a substantial rate. Last week challenged that idea a bit.
The first period of the stock recovery in March and early April was very sharp, but by mid-April through mid-May, the stock recovery started to level out and consolidate sideways.
However, later in May, there was another strong leg up, and it brought equities sharply higher into early/mid June.
Last week, however, saw a violent correction that knocked a couple weeks worth of gains off of the major stock indices. Most of the downside occurred on Thursday. This chart is for the S&P 500, which represents about 80% of the U.S. stock market capitalization and is tracked by the C Fund:
In addition to this heightened volatility, the number of small investor accounts has surged, with millions of people not only buying stocks, but buying speculative call options, which are riskier and more bullish bets when deployed in such a one-sided way.
The combination of commission-free trading, the pandemic-related closure of sports gambling and casinos, lack of work, and plenty of government transfer payments, has led to an unprecedented amount of bullish options activity among small trading accounts:
Many investment pros are taking this as a contrarian sign. With so much enthusiasm among retail investors, many institutional investors are concerned about the speed and euphoria that has been present in this sharp stock market recovery while the economy itself remains significantly impaired.
Overall, this remains a very complicated time for markets, with unprecedented levels of job losses, offset by unprecedented amounts of fiscal and monetary stimulus. Speculative trading activity is extremely elevated.
Federal Reserve Press Release
The Federal Open Market Committee (FOMC) of the Federal Reserve releases an update and conference every 6 weeks, and they had the most recent one on Wednesday of last week.
The Federal Reserve’s chairman, Jerome Powell, gave a fairly somber outlook on the economy, and the Federal Reserve provided economic projections that show, according to their analysis, the unemployment rate will be 9.3% by the end of 2020, 6.5% by the end of 2021, and 5.5% by the end of 2022. This is their base case with a lot of variability around it.
For context, the official U-3 unemployment rate was 3.5% in February 2020 prior to the pandemic shutdown, and reached 14.7% in April 2020 at the height of job losses. During the 2008/2009 recession, unemployment reached as high as 9.9% and took until 2016 to get back below 5%.
Powell also cited broader unemployment measures, such as U-6, that show unemployment levels of over 20% currently. Due to this, he announced the Fed’s intentions to keep interest rates at around 0% through 2022, with no plans to even consider raising them for a while.
This presents a high probability of the G Fund continuing to pay low yields, unless the Treasury duration curve steepens massively. Currently, the G Fund is paying 0.06-0.07% per month, or about 0.7-0.8% on an annualized basis, which is below the Federal Reserve’s 2% inflation rate target, and this puts a lot of pressure on savers.
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.