I agree with Sarah that we are in a bear market and should remain defensive. She did good moving out of equities during the current rally. Trying to catch the exact top is difficult and chasing returns can be dangerous to your retirement funds. Bear markets are about shedding risk and small caps are considered riskier than large caps. I would avoid small cap stocks (TSP S fund) until the bear market has run its course.
The current bear market rally was extended thanks to the Fed's capitulation on normalizing monetary policy – the main street beatings will continue until the wall street's morale improves. And the European Central Bank adding corporate bonds to their QE purchases which has caused spreads to narrow in the high-yield bond market leading to a risk-on rally (to include small cap stocks). And of course the largest buyer of the stock market today - corporate buybacks using debt and compromising their balance sheets. And of course the energy sector bounce which also relieving pressure on the bond markets.
The central banks' interventions in the bond markets and to include the BOJ directly buying into the stock market is similar to dipping the thermometer into cool water before reading it and determining the patient (the economy) is okay.
The question today is how much of the recent monetary capitulation has been priced into the market. The divergence between economic reality, corporate earnings and the stock market price is near an all-time high. The financial markets can stay detached from economic reality for a long time but tend to close the gap during the summer and fall months. And let's not forget the GAAP corporate profits are at 2011 levels and need to grow 60% to match the stock market's growth since 2011. Even if we return to previous revenue and earnings growth levels, the markets are still extremely overpriced. If you want better returns from your TSP account, you have to wait.
I track the ECRI Weekly Leading Indicator. I do not know when the article was written but I see it was recently "published". The article's findings were true a few weeks ago, but the ECRI Leading Indicators has surged recently. The ECRI does not let on as to what they track. Some of the inputs are probably from the financial markets, so manipulations by the central banks could affect the indicator. My economic leading indicators have not improved yet. Since the stock market is a leading indicator it is not surprising they both moved up together, but that also means they could also move down together.
The markets do not move in one direction. Bear market rallies are the most impressive and more so with central bank's help. If you held waiting for the rally, when are you going to move to safety? Consider that we are entering the unfavorable season for equities and the SP500 has already had two drops greater than 10% during the last year from these levels. I do not think sitting on the sidelines until next fall will cost you much and it might save you a lot of grief. It also gives us about 6 months to see how things unfold.
Invest smart,
Michael Bond
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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