Just two days after the Federal Open Market Committee (FOMC) decided to maintain the Fed rate at 5.3%, the July jobs report revealed weaknesses in the labor market, catching many investors off guard. An abrupt shift in momentum had already taken place from a rally Wednesday to a sell-off on Thursday. Suddenly, investors felt the Fed had blundered by not cutting rates days before and the selling accelerated Friday.
The S-fund bore the brunt of the sell-off. Just days earlier, S-fund investors were celebrating a 6.23% gain in July, buoyed by expectations of a Fed rate cut in September to begin a soft-landing. However, over the next two days, the S-fund plummeted by 5.72%, including a 3.24% drop on Friday alone.
Here are the weekly, monthly, and annual TSP fund returns for the week ending August 2:
Now, investors are questioning if the sell-off is over. Those still fully invested are wondering if they should exit on Monday, while those holding cash might be tempted to buy discounted stock funds.
The S-fund's price isn’t exactly ‘discounted’. This late week selling may have been an overreaction, but it corrected the excessive buying from weeks prior. The average price of the S-fund in 2024 is $79.20. Its current price is $79.74 and is back within a range that was traded most of the summer.
The price range where the S-fund lived from July 11[SUP]th[/SUP] to July 31[SUP]st[/SUP], which reached as high as $85.63, was for opportunistic TSP investors, but nothing much has changed for the buy-and-holders who weren’t paying attention.
The quick spike in volatility is what has swing investors perking up their heads. There is a new narrative about interest rates, inflation, and the jobs market that could drive prices around for some time. Market timers want to catch the right waves that comes with the new paradigm.
Following the weaker jobs report, the new argument is not whether if the FOMC is going to cut rates in September, but rather by how much they will cut them. The market thinks the FOMC missed their opportunity to cut rates on Wednesday and is now behind on an actively cooling economy exposed by the July jobs report. But when you look at the numbers for these expectations it seems the market is already calming down from its initial reactions.
Take a look at the CME Group’s FedWatch tool. This tracks the probabilities of Fed Fund rates at each of the FOMC meetings according to interest-rate traders.
On Wednesday, the probability of a Fed cutting rates by 50 basis points in September was 15% compared to the 85% probability of a more conservative 25 basis point rate cut. That 15% probability of a 50-basis point rate jumped to 74% in reaction to the July Jobs Report on Friday. This sudden change expresses a spike in urgency by a nervous market. But already, those expectations are calming down. On Saturday (August 3[SUP]rd[/SUP]) the probability of a 50-basis point rate cut in September settled to 22%. To me, this is a sneak peek that the panic selling will not live on to Monday.
Despite the weaker jobs report, the labor market is not flashing recession signs. The unemployment rate of 4.3% is manageable, especially with growing labor market participation in July.
In light of this, I don’t see a reason to dump your stock funds and hide. If you’re considering increasing stock exposure or redistributing your allocations, consider tuning into one of the TSP Talk Premium Services to navigate this new volatility. They offer monthly subscriptions with no long-term commitment.
As the writer of the Last Look Report, I focus on the investment changes made among the TSP Talk AutoTracker.
This week the TSP Talk community reduced its exposure to all three TSP stock funds (C,S,I) while increasing exposure to both the G and F-funds:
The F-fund rose 2.43% this week taking in losses from stocks. A few TSP Talk members added some to their allocations.
This week's action also shook up the top of the 2024 TSP Talk AutoTracker Standings. Booster is the new leader of among all members for the year. Booster climbed to the top as a result of moving out of the S-fund and into the G-fund on July 30th. Eight other members made moves to the 100% G-fund that day. Now only four members outperform the C-fund for the year and the top three are all holding the G or F-fund.
Sign up for the Last Look Report to catch any of these members making their next move.
Top TSP Talk Investors
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
Weekly Wrap-Ups Archive
Facebook | Twitter
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.
