This week saw a major shift in the pecking order of TSP funds. The S-fund, typically overshadowed by the C-fund, delivered a stellar return, vastly outperforming its peers. This blog dives into the factors behind this change, explores how investors reacted, and analyzes what it might mean for your TSP strategy moving forward. We'll also discuss the recent outperformance of the I-fund and the potential impact of the rate cut anticipation.
S-fund investors' patience paid off this week. The S-fund added 4.06% to its value this week. A return you would have to wait a year for the G-fund to accumulate. Most of those gains came Thursday when the S-fund rallied 2.34%, while the C-fund fell 0.87%. This wave of rotation was sparked by the latest Consumer Price Index report, which showed its lowest annual increase since June 2023.
In the eyes of investors, this report solidifies a coming rate cut from the Federal Open Markets Commitee (FOMC) in September. In response, they rushed to small-cap stocks benefiting most from lower rates and left the tech giants holding up the market through the higher rate environment.
On Thursday, the Magnificent Seven collectively lost their most single-day market value since February 2022. Yet, intra-index rotation into sectors like real estate, utilities, and industrial groups kept the S&P 500 (C-fund) from a significant correction. The losses of the C-fund were kept to under 1% for the day.
The rally for small caps continued into Friday, but this time the C-fund joined with some gains itself, though it continued to underperform the S-fund. The C-fund put together a gain of 0.88% for the week, outperformed by both the S and I-fund.
Here are the weekly, monthly, and annual TSP fund returns for the week ending July 12:
This makes the fourth straight week the C-fund has not given its investors the best return. The C-fund underperformed both the S and I-fund across the four weeks as well. Since June 14th, the C-fund is up 3.47%, the S-fund is up 5.39%, and the I-fund is up 4.92%. These are decent returns across the board for a four-week period, but C-fund holders have lost their edge despite the C-fund still holding the best return for 2024 (+18.60%).
Yet, in backwards fashion, TSP Talk AutoTracker investors have continued to pick up more of the C-fund. It is the only TSP fund the TSP Talk AutoTracker has increased its collective exposure to in each of the last four weeks. The average allocation of the C-fund has risen from 29.99% on June 14th to its current level of 32.81%. In that time, the I-fund is the only other allocation the AutoTracker herd has lifted, but the increase was only 0.25%.
This week, the TSP Talk AutoTracker's average allocation of the C, G, and I-fund all increased to some degree, with the C-fund increasing the most. While the S-fund outperformed by a far margin this week, its average allocation dropped the most.
It wasn't profit taking that nudged the exit in the S-fund, but rather capitulation. The average allocation of the S-fund was even lower in the days before Thursday's rally.
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The best entry point for the S-fund came on Tuesday when the fund pulled back 0.56% before going on to gain 4.29% over the next three days. However, we saw no member of the TSP Talk AutoTracker increase their S-fund holdings significantly Tuesday, yet five members decreased their S-fund exposure, stepping aside for the returns to come.
That left only those holding 100% S-fund through the week to share the title for best return for the week (4.06%). But it is the eleven members who have held the I-fund through the month who hold the best return for the month so far. Ten of the eleven have held 100% I-fund for all of 2024.
Where to Go from Here?
Each of the TSP stock funds is at or near their highest price of the year. A rate cut is coming; the market is nearly certain. Is the rate cut fully priced in, or will the market carry higher until it takes place?
Even if the market is currently overvalued, the anticipation of the upcoming rate cut may at least prevent a major correction. The S&P 500 was kept safe from this week's sell-off in tech because of its diversification in other rate-dependent sectors. The tech sector bounced back on Friday, so dip buyers are still interested. The high prices of the TSP stock funds may be hard to buy into without feeling like you're chasing, but buying into any pullback could feel reasonable if you think a deeper correction is off the table.
The market may start to feel pressure from the labor market. Concerns about inflation are now turning into concerns about economic stability. The consumer is the backbone of the U.S. economy, and the labor market feeds the consumer its spending money. But this cyclical relationship can move in both directions. If the labor market struggles, that reduces consumers' spending power and decreases their demand. In response, businesses would cut back on production, potentially cutting more jobs, and in churn would further decrease demand. The churn could spiral the U.S. into economic contraction if untreated by the Fed.
Diversification is an option for investors involved in this market. The indices have generally moved higher together but if one TSP stock fund falls there seems to be another to collect the gains. The S-fund proved this week it can be a profitable investment, the C-fund proved its lower half can hold it up when the tech giants slip, and the I-fund has been able to outpace both this month.
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Good luck and thanks for reading! We will be back here next week with another TSP Talk Wrap Up. You can read our daily market commentary at TSP Talk - Market Commentary.
Thomas Crowley
(TommyIV)
www.tsptalk.com
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The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
