financial planner Stephen Zelcer
July image for TSP Planning Report

TSP Planning Report July 2022

Facts:

  • The G Fund rate for July 2022 remained at 3%.
  • The Fed Funds interest rate increased to 2.4% from last month’s 1.65%, and from May’s 0.9%, and they anticipate more rate increases over the remainder of this year.
  • This month’s unemployment rate remained unchanged, at 3.6%.
  • PMI (Purchasing Managers Index) continued to expand (any reading above a score of 50 means expansion), although slower than in previous months. This month’s reading came in at 53, compared to last month’s 56.1.
  • The S&P 500 (C Fund) decreased -6.55% in the month of June. The S&P 500 was briefly down 20% (official “bear market” territory) for the year, but is now down -13.89% YTD.
  • The 1st estimate of Q2 GDP shows a negative -.9% GDP. This is back-to-back quarters of negative GDP which means the American economy has entered a “recession.”

Assessment:
Recession or no recession? Who cares?
GDP is a retrospective measure, meaning it tells you what was, not what will be.
Yes, we know things are ugly. The question is – do investors feel there’s light at the end of the tunnel? If they do, the stock market will recover.

Let me share what I observed back in March of this year.
Consumer Sentiment
The University of Michigan Consumer Sentiment Index (MCSI), a monthly survey of how consumers feel about the economy, personal finances, business conditions, and buying conditions, ended March 2022 at 59.4%, representing a 5.4% decline from the final reading of 62.8% in February 2022 and a 30.0% decline from the index’ reading of 84.9% one year ago in March 2021.

This means people are really not confident about the economy.

However, economists debate whether consumer confidence is a “leading” indicator – meaning it forecasts what will happen in the future – or a “lagging” indicator – meaning it tells an old story and is no indicator of future economic activity.

If you view consumer sentiment as a “leading” indicator, then people will be spending less money, which means companies will be less profitable, which will drive down the value of stocks. If you view it as a “lagging” indicator, then it does not point to future stock drops, but instead merely explains why the market dropped in the past few months.

Interesting to note, the stock market rose about 8% in the 14 days following the University of Michigan report!
Also, interesting to note, consumer sentiment started declining in April of 2021. At that time, the S&P 500 (C fund) was valued at $3,900. As consumer sentiment continued to decline, the S&P500 continued to rise, reaching $4,800 by December 2021.

Bottom line here – consumer sentiment doesn’t clearly forecast market declines, so please don’t panic sell.

Back to July 2022 –
I don’t know how sentiment will shape the stock market, but let me remind you – in this environment even Bonds are not safe – The F fund is down over 10% YTD. And the F fund will continue to fall as the Fed raises rates. This month, they raised rates by 0.75%. They have scheduled two more rate increases this year – in September & November – which will further drive down the F fund.

Bottom Line:
The market has already dropped significantly and it has recovered significantly. During the month of July, the S&P 500 rebounded over 9%. A rebound, when it comes, usually comes quickly. As such, it’s hard to advise to pull out of the market. My general advice is to give it time. Time is the ultimate risk mitigator.

If you are seeking 4% yields, you may be able to accomplish this in the near future without any stock exposure, because the G fund yield is rising quickly. This, in turn, decreases the need for stocks in my lower-yielding portfolios.
However, for higher yields you will still need stock exposure. Keep investing, and go on with your business. In fact, you may want to introduce some more money into the C & S funds to capture the bounce-back. Your new TSP contributions should go 70% C fund, 30% S fund to catch a bounce-back. If your G fund is overfunded (if you don’t know what overfunded is, contact me asap), consider doing an inter-fund transfer from G into C & S to participate in the bounce-back.

See this month’s recommended portfolios. DON’T JUST LOOK AT RATE OF RETURN. Always view the target return of each portfolio in context of its ranges of fluctuation.

Anyone who has more than 5 years before drawing income from their TSP should consider taking a more aggressive posture going forward and use my aggressive portfolio’s below. If you are within 5 years of retirement, you should email me to get a more customized recommendation.

If you have any questions, feel free to contact me.

Email me here – stephen@stephenzelcer.com

Click here to download my portfolios.

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