TSP

It might be a good time for TSP investors to check their asset allocations and ensure that they are appropriately positioned for their unique situation, risk tolerance, and retirement goals, rather than chasing the performance that the market enjoyed over the past few months.

Lyn Alden

The stock market had a strong rally from its March 23 low point, but now seems to be facing some resistance.

On June 9th, the market broke its uptrend, and on Thursday, June 11, the market saw the biggest down-day since March, with an S&P 500 decline of nearly 6%.

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Here’s a technical chart of the S&P 500 (which the C Fund tracks) over the past year:

Chart Source: YCharts

Its momentum structure broke, its technical MACD had a bearish technical breakdown, and so its overall risk level is elevated. It has recovered a bit, but overall its technical indicators continue to be perilous.

This was similar to mid-May, when it had a similar consolidation period and bearish MACD breakdown, although this one in June is more emphatic. It managed to stage a strong recovery in May, but will it be the same for June?

Stock Market vs Economy

Since the beginning of the year, the S&P 500 had a big crash followed by a big recovery, and is nearly up to the level that it was at when the year started.

However, there are currently over 29 million people that are filing some sort of continued jobless claims at the moment, which is up from fewer than 2 million at the start of the year.

This includes over 20 million formerly-employed people, and another 9 million self-employed people that are not normally covered by unemployment insurance, but are covered by the Pandemic Unemployment Assistance (PUA) program as part of the CARES Act.

Data Source: Department of Labor

Stock Market vs Federal Reserve

The stock market has been heavily supported by fiscal spending (over $2.7 trillion in fiscal pandemic-related spending has been passed by Congress this year), as well as by the Federal Reserve’s monetary policy.

Specifically, the Federal Reserve created new dollars to buy the Treasury bonds that the Treasury issued to fund all of these programs. The Federal Reserve also created new dollars to buy mortgage-backed securities, municipal bonds, and corporate bonds. They also loaned dollars to international markets, since the dollar is the global reserve currency and is used throughout the world for a large portion of international payments and settling of international debts. Specifically, the Fed increased their balance sheet by $3 trillion since March, and all of those new dollars went to various asset purchases.

However, in recent weeks, the Fed has slowed their asset purchase programs. Fiscal spending has also winded down. Many investors expect another round of Congressional fiscal spending later this year, but until then, there aren’t a lot of catalysts to push the market higher.

Here’s a chart of the total stock market (represented by the Wilshire index, which is roughly similar to the C Fund and S Fund combined):

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Chart Source: St. Louis Fed

The stock market has been able to decouple from the economy and move higher due to an unprecedented degree of fiscal and monetary policy support, and both of those are waning this summer. On that chart above, we can see that the Fed’s balance sheet (red line) is tapering in recent weeks, just as the stock market (blue line) also became quite “toppy” looking.

I don’t know what the stock market will do in the months ahead, but this has been a very strong rally in a very difficult economy, and the recent fiscal and monetary support for that rally is fading in the near-term.

It might be a good time for TSP investors to check their asset allocations and ensure that they are appropriately positioned for their unique situation, risk tolerance, and retirement goals, rather than chasing the performance that the market enjoyed over the past few months.

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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.

TSP Investors Handbook, New 6th Edition