Full access members, our December 2015 Current Situation Report has been posted.
The two year perspective paints a pretty good picture of the TSP equity funds. The chart below shows only the price action of the TSP equity funds without dividends. As a reminder, the TSP C fund tracks the SP500 index or 500 of the largest US companies out of approximately 5,000 companies listed on the US exchanges. These 500 companies (only 10% of those listed) account for approximately 80% of the market value of the total US market.
The TSP S fund tracks the non-SP500 US companies listed on the exchanges and accounts for the other 20% of the market value. Combined the TSP C and S fund cover all of the US companies listed on the US exchanges. There are foreign companies listed on the US exchanges, but they are not included in these two indexes or funds.
The TSP I fund tracks the MSCI EAFE Index which is an equity index that captures large and mid sized companies represented across the developed market countries around the world excluding the US and Canada. With 909 constituents as of February 2015, the index covers approximately 85% of the free float-adjusted market cap in each country. At the end of September 2015, 41% of the market value was part of the Euro currency, 20% from the UK, 23% were in Japan, 6% Australia, and 3% Hong Kong. China is not included in this index.
Many investors were disappointed that the TSP I fund during 2014. In 2014, the US dollar rallied 20% thus subtracting 20% from the capital gains of the index. Without the currency loss, the TSP I fund would have tracked fairly close to the SP500 index. In 2015, the US dollar was relatively flat against other currencies and the TSP I fund did fully capture the gains of the other developed countries. This included the boost to the Euro countries from the ECB launching their first QE program.
The TSP S fund has been trading sideways for much of the last two years. It appears to have gotten a push higher in early 2015 with the help of the ECB QE program. Since mid-2015 both the TSP S and I fund have underperformed the TSP C fund with the TSP S fund returning to its sideways trading range. The TSP S divergence from the TSP C fund reflects a shift of funds flowing to a few mega-sized companies within the SP500. I see this shift as part of a larger trend of investors growing aversion to holding risk.
I’ve noticed that once again on 4 December, the same pattern described above occurred with the ECB’s weaker than expected announcement on the extension of their QE program. The TSP C fund recaptured most of its losses but the TSP S fund did not. The dust still has not fully settled on this event, but a lot of expectations that the central bankers are coming to the rescue once again were dashed this week. While we hope to enjoy the Santa Rally (it does exist), tread lightly in the new year.
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