The simple answer is we are in the early stages of a bear market. What the funds did in the past does not matter.
The smart money has been running away from risk since last summer. Since small cap funds are riskier than large caps money has moved to safer large cap stocks. But they will succumb to the lack of underpinning fundamentals at some point. Small caps also come with the double whammy of much higher valuation levels.
Trailing 12-month PE ratios:
TSP C fund = 20.8
TSP S fund 34.6
TSP I fund was around 18
I use Vanguard's PE ratios since many quotes for PE ratios LEAVE OUT companies with negative earnings. So you will see PE ratios closer to 20 for small caps in other places which are terribly inaccurate.
So the small cap fund (S fund) by this simple short term measure is valued over 50% higher than the large cap C fund. While their stated earnings are highly suspect at this time, we'll assume they are accurate. The bottom line is these are historically high valuation levels for all the funds.
All the funds are valued for extremely high growth going forward yet we are in a borderline recession, if not already. Yes, during bull markets the small companies can grow faster and deserve higher PE ratios. But consider, the SP500 corporate earnings have seen negative growth the last 3 quarters and their revenue has seen negative growth the last 4 quarters.
The Atlanta Federal Reserve's GDP model continues to show slowing growth. Global economic growth is grinding to a halt and financial flows are near a state of panic as highly leveraged speculative bets are being unwound.
"Forecasts" keep saying growth is just around the corner, but it never arrives. The forecasts come from models that say we are supposed to have growth, but no one in the mainstream media questions the soundness of the models or the "seasonal" adjustments to economic data. I prefer to rely on market internals and measures of risk preference.
Market internals and investor preferences for risk have been giving clear signals since last summer. I even aborted trading the Santa Rally in mid-December because my indicators were signaling a potential market crash and told my subscribers to expect weakness after the end-of-year strength was no longer in place to support the stock market.
It's not rocket science, you just have to know what to look for and what to ignore. There of course will be a seductive bear market rally sometime in the near future. You can either sell into strength which I have been advising since last spring or sell lower later - my S fund model had a 6.02% in 2015.
As for the recent estimate-beating 292K jobs growth numbers. The BLS seasonal adjustment added in around 300K for December. So it was all seasonal adjustment. Which does not mean there was no growth, it just means we don't really know how many jobs were created. Yet the mainstream media is gushing all over the manufactured numbers. BTW, December 2000 and 2007 jobs created was higher.
Michael (TSPsmart.com)
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Posted by: Michael Bond <michaelhbond@yahoo.com>
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Neither the TSP Strategy group, nor individual members, are licensed or authorized to provide investment advice. Any statements made herein merely reflect the personal opinions of the individual group member. Please make your own investment decisions based upon your personal circumstances.
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