This is your TSP Watchdog ALERT for the week ended June 5, 2020.
* * * WE HAVE TREND CHANGES TO REPORT THIS WEEK * * *
Stocks surged for the third straight week – as investors continue to focus on progress re-opening the economy after 2-3 months of lockdowns. The S&P 500 jumped 4.91%. The Dow catapulted 6.81%. The NASDAQ climbed 3.42%.
The NASDAQ briefly traded above its Feb all-time high.
(all stock market data from Yahoo! Finance)
Prices were higher every day, but Fri provided the biggest gains – as a shockingly strong employment report surprised investors who responded giddily and ran prices up more than 800 points on the Dow.
The market was expecting Fri’s employment report to show another 5-7 million jobs lost. Instead, the report showed a GAIN of 2.5 million jobs (according to the Wall Street Journal online edition). Buyers piled in on this news – seeing it as confirmation that the economy was re-opening faster than previously expected.
The disconnect between the market and the economy is even greater than it has been when we talked about it in previous weeks. Yes, some folks are back to work, but there are still 40 million people not working today who were working just four months ago. 40 MILLION! Many of these people do not have a quick, obvious path back to work – in industries like leisure, travel, restaurants and retail. Even many state and local governments are laying off workers with no specific plans for when they will bring them back.
Legendary investor, Jeremy Grantham, who heads the $80 billion asset management firm GMO (yes, the “G” is for Grantham), sees this disconnect between the market and the economy – and is reducing equities for GMO clients and funds from 55% to 25%. Guided by the principal that they would not invest their own money at current market levels, GMO would rather “look stupid” for missing some upside than “lose 30-40% in another leg down.” (Financial Review – Chanticleer, 6/2/2020, 10:12 AM, “Rally Leaves Jeremy Grantham’s GMO Nervous”)
The best (and maybe ONLY) explanation for the market’s strength in the face of huge economic problems is the massive amount of money (“liquidity”) the Federal Reserve is pumping into the financial system. Significant amounts of this money is finding its way into the market – and pushing prices higher. With interest rates so low (in some places actually negative – people paying others to hold their money safely!), many investors see stocks as the only place to put money. Encouraged by lockdowns ending and a BIG positive surprise in employment, and despite civil unrest (which usually does not impact stock markets too much), investors are buying shares with liquidity provided by the Fed.
There is an old investment adage – “the market can stay irrational longer than you can stay liquid” – which is to say that the market can act crazy (irrational) a lot longer than you think.
Another investment adage – “the market is always right – eventually” – hints at the short term fallibility of the market but it’s long term accuracy.
All this to say – the market is loony right now, but we cannot deny what it is doing. Our job is to evaluate what IS happening – not what we think SHOULD be happening.
In our TSP Watchdog database, we have trend changes to report this week:
The C Fund is back on a positive trend.
The S Fund is back on a positive trend.
The I Fund is back on a positive trend.
All the L Funds are back on positive trends.
We report these trend changes with VERY mixed feelings. We are committed to our process – following Moving Average Trend Analysis – but we are concerned that the market is behaving in a manner that presents investors with quite a bit of risk. Moving back towards all-time highs, which were reached previously when the economy was MUCH stronger than it is today, makes very little sense. Thus, owning stocks at these prices when the economy is nowhere close to as strong as it was when prices were at similar levels just 4 months ago, is a risky proposition.
And yet, here we are. The market has bounced very sharply after a very sharp decline. I have not been able to find a previous incidence of any market – US stocks, int’l stocks, bonds, gold, etc. – declining 30% and recovering fully within the 40-week time frame that we use for our trend analysis. In other words, this is the only instance that am aware of that a market has reached an all-time high, declined 30% (or more) and then fully recovered back to its all-time high – all within a 40-week period (which is the time period we use for our trend following analysis) as the NASDAQ has done. In all previous declines of 30%, and subsequent recoveries, it took longer than 40 weeks to complete the cycle.
That said, our “official” recommendation is to move back into the funds that are on positive trends according to your chosen allocation. In our allocation models, we will reflect all funds that are on positive trends as being long in the portfolios. For the purpose of calculating the performance of our recommendations, we will show the repurchase of the C fund, S fund and I fund in all our model allocations.
HOWEVER, at the same time, we will offer some alternative approaches and ideas for you to implement these trend changes in your TSP account. As with Jeremy Grantham’s guiding principal – I am not comfortable investing my own money at this time – so I want to provide some alternative approaches for you.
- If you see yourself as more aggressive, more comfortable taking risks, more interested in maximizing your upside than protecting against downside – then you can consider moving back into the C fund, S fund and I fund fully at this time. I would caution you to keep an eye on the trends of these funds going forward – just in case the current trend change is a “head fake”. You will want to be “nimble” in this environment (as my friends at Miller Tabak say).
- If you see yourself as more conservative, are close to retirement or more concerned about avoiding losses than maximizing your gains, you may hold off on buying back into the C fund, S fund and I fund at this time. You would do this knowing that you might miss out on some upside, but also knowing that you are protecting your principal during an unprecedented time. Your overall mindset to follow this course of action is “better safe than sorry”.
- If you would like to cover yourself on both fronts – get back into the market, but more cautiously – then you might consider buying back in over a period of time rather than all at once. As long as trends remain positive, you could buy an equal dollar amount of the funds that are on positive trends periodically until you are fully invested to your desired allocation. The TSP limits interfund transfers to 2 per month – so the best interims for this type of “dollar cost averaging” is every two weeks, or every month.
The bottom line is that the market has been through an historic cycle over the past four months – from all-time highs, thru a 30% decline and back up towards the previous highs. Initially, we were very happy to be on the sidelines beginning Mar 2. But the market’s quick recovery means we did not actually avoid any long term losses – we just didn’t ride the market down into the trough. We skipped the roller coaster ride.
As the market now approaches its previous highs, and the trends turn positive again, we are nervous about committing capital to stocks at current levels. While some level of trepidation accompanies every trend change and accompanying portfolio shifts, we have some concerns that the uniqueness of the current market cycle may render the current trend changes as false signals – leading to purchases made just before the next leg down.
It is usually NOT a good idea to fall into thinking “this time is different”, but given our concerns about the disconnect between the market and the economy, we offer some alternative ways for you to approach these trend changes – based on how conservative or aggressive you want to be.
Again, our “official” recommendation is to BUY back into the C fund, S fund and I fund. But, if you are in the “better safe than sorry” camp, you may prefer to follow one of our alternative approaches.
Please feel free to reply to this email with questions. We expect a large number of inquiries this week, but we will reply as quickly as we possibly can.