December has been a rough month to cap a rough year for the TSP.
With one trading day to go on New Year’s Eve, the C Fund is down 9.8% within the month of December. The S Fund is down 11.5% and the I Fund is down 5.2%. The bond funds are in positive territory for the month, with the F Fund up 1.6% and the G Fund up a small fraction of a percent.
For the full year 2018 with one trading day left, the C Fund is down 5.2%, the S Fund is down 10.1%, and the I Fund is down 13.8%. The F Fund is virtually flat, and the G Fund is this year’s best performer so far with nearly a 2.9% gain for the year.
This December saw a sharp decline and the worst Christmas Eve performance ever by the S&P 500, which is what the C Fund tracks. The market has never fallen by more than 1% on Christmas Eve in 90 years of index history, but fell by a whopping 2.7% on Christmas Eve this year.
And then, the day after Christmas, the Dow Jones Industrial Average had its biggest point gain ever, with a more than 1,000 point increase. Both the Dow and the S&P 500 were up almost 4% on that day. In the couple days after that, the market has seen ups and downs, with high volatility during each day.
What to Look for in 2019
The market is in a challenging situation right now, with a mix of positive and negative signals.
On one hand, the U.S. economy is nine and a half years into the second longest economic expansion in U.S. history. If we reach July without a recession, we’ll have the longest period without a recession on record since George Washington was president. On top of that, we can see a lot of clear “late cycle” elements in place right now, including high corporate debt levels, rising interest rates, and a flat yield curve.
On the other hand, the market sell-off in 2018 let some steam out of stock prices. Valuations were very high earlier this year, with the total stock market capitalization of U.S. equities reaching almost 150% of U.S. GDP at its peak. The cyclically-adjusted price-to-earnings (CAPE) ratio hit a peak of over 33. However, the market cap to GDP ratio is now down to nearly 120% of GDP, and the CAPE ratio is down to under 28. These aren’t exactly cheap, but they aren’t super expensive anymore.
With that in mind, there are a few key things that are worth watching in 2019 because they could have big impacts on the market.
U.S. and China Trade Relations – With the clock ticking on a potential trade deal between the United States and China, any developments in this area could be the year’s biggest financial news. The United States seeks to reduce its trade deficit with China, further open up China’s markets to foreign investors, and to halt what are widely viewed as unfair intellectual property practices by Chinese government-backed companies. A failure to secure a deal could result in a big spike in tariffs, higher consumer prices, and a major need to reorganize global supply chains. In addition, a slowing Chinese economy has big ramifications for the rest of the world, considering that it’s the second largest economy now.
Brexit, Italy, and the European Union – There’s still a lot of political and financial uncertainty around Britain’s exit from the EU, and Italy’s high sovereign debt levels and rocky relationship with EU regulators. Stock valuations are low in Europe, but their GDP growth rates are also very low. Any significant developments for European politics, positive or negative, could impact global markets in a meaningful way.
Economic Data and Fed Actions – GDP growth rates, employment data, and other metrics for the U.S. and other countries could be interesting in 2019. Will economic growth slow, or stabilize? Will the Federal Reserve see enough economic resilience in the U.S. economy to continue raising rates, or will it halt rate hikes or even cut rates?
Strong Dollar, or Weak Dollar – One of the biggest things negatively impacting foreign stocks for U.S. investors is the strength of the dollar. A weaker dollar is a tailwind for foreign stocks, which is what happened in 2017 when the I Fund had strong year. During 2018, the fact that the Federal Reserve was raising interest rates was very strong for the dollar, and that’s a headwind for U.S. investors in foreign stocks. If the Fed slows down rate hikes, its possible that the dollar could weaken.
This chart shows the strength of the dollar over the past decade:
Dollar Index vs Basket of Global Currencies