While the TSP S fund traded sideways for a better part of 2014, the TSP C fund steadily climbed. In 2015, it is the TSP C fund that is trading sideways. For those who track year-to-date performance, at the close of Friday the S fund was up 3.0% and the C fund was up 2.2%. Since I prefer to track peak-to-peak performance, I’ve plotted both funds performance since the closing price on 29 December 2014.
Since the market’s peak in December 2014, the S fund is up 1.8% and the C fund is up 0.6%. The S fund’s current gain is well off its peak in June where it was up 7% beating the TSP C fund by 4.5%. As discussed in Summer Walks and Market Observations, the S fund has a history of pulling ahead of the C fund during rallies but losing all of its relative gains during market corrections. The bad news for TSP S fund investors today is that while the S fund was down close to 5% on Friday from its market peak, the market has yet to correct.
The TSP C fund is only 2.3% off its all-time high on 20 July. So far in 2015, the TSP C fund has not seen a 5% correction. The S&P 500 has only avoided a 5% correction the entire calendar year three times since 1964. Also this month marks the fourth year since we’ve seen a 10% correction in the TSP C fund. In the last 60 years, the S&P 500 index has only avoided a 10% correction for a longer period of time twice. The previous drought lasted 4 1/2 years and ended with the beginning of the 2007-08 bear market.
Our last 10% decline occurred in 2011 after the S&P 500 traded sideways for 5 months. Just 11 days prior to the market slide, the TSP C fund was within 1% of an all-time high. A month later, the TSP C fund was down 16% and the TSP S fund was down 23%. The TSP S fund would ultimately lose 26% by October before the start of the current market run without a 10% correction. Note that the difference in the two funds losses equaled the difference in the outperformance of the S fund during the preceding year.
Not that history repeats precisely, but the 2011 pattern occurred 2-3 weeks earlier than the current pattern on the calendar. For the pattern to repeat, the market would break below its current support level in the latter half of August. As in 2011, we are presently in the unfavorable season for equities when deeper market losses occur so a repeat in August – October should not be a surprise.
Some will dismiss the concept of the unfavorable months and point you to 2013 when the market steadily climbed. But I will point you to 60 years of market history and the unprecedented Federal Reserve’s balance sheet expansion by over 4 trillion dollars with multiple versions of “quantitative easing” that kicked into high gear during 2013.
The 2011 “correction” occurred after QE ended and the market recovered after the next version of QE was announced. Not only has the stock market support program (QE) ended again, but the Federal Reserve is communicating it wants to raise interest rates this Fall to avoid being stuck at zero like Japan. In many ways, a deep correction is baked into the cake. My opinion is that market risk is NOT static and can be significantly reduced by avoiding times when it is measurably elevated based on historical data.
I reject the buy and hold mentality to include Lifecycle funds that accept full market risk but in vary levels of allocation percentage. This does not imply I support jumping in and out of the market trying to time it precisely. My seasonal strategy takes advantage of an annual pattern of risk and returns that over the full market cycle can significantly beat a buy and hold investor. But a study of the longer market cycle of bull and bear markets also reveals other historical measures of increasing market risk to be avoided.
My studies go beyond the simple look at price patterns as presented in the chart above. But after four years of low market volatility during the global central bankers liquidity fueled bull market, we need a reminder of what a non-QE fueled market looks like and what to expect over the course of the current unfavorable season in equities.
I hope it is obvious that I am recommending avoiding equities at this time as I have been advising selling into strength since Spring. I truly do not like seeing the average investor soak up all the losses. If you are interested in learning when objective historical measures are pointing to the all clear to invest in equities again, you can sign up at on my TSP Smart Investor website at varying levels of service depending on your needs. My goal is to do the leg work so you make historically informed allocation decisions or to follow simple-to-execute timing signals.