This is your TSP Watchdog UPDATE for the week ended April 9, 2020.

Stocks bounced very strongly this week – with the S&P 500 gaining 12.10%, the Dow jumping 12.67% and the NASDAQ advancing 10.59%.  It was the best one-week gain since 1974 (according to our friends at Miller Tabak & Co.) – in just four days of trading (as Good Friday was a market holiday).

It is still all about the coronavirus.  At this point, the focus is on where we are in our efforts to “flatten the curve” through widespread stay-at-home guidance/restrictions, social distancing, regular hand washing and covering our faces in public places.  Expectations are that we may be at, or near, a peak in new cases – and, while the death toll has been brutal, investors acted as if they may be starting to see a light at the end of the tunnel.

Only time will tell if that light is the far end of the tunnel, or an oncoming train.  The current situation is certainly unique – perhaps justifying the common refrain “this time is different”, but it is unusual for a market to touch bottom and then take off in a “V” shaped recovery.  A much more common pattern is for the market to bounce off the initial bottom, often very sharply, and draw investors back in – only to fall back and re-test the previous lows.  This type of “suckers’ rally” is especially common during bear markets (declines of more than 20% – which we have now) that are associated with a recession (which is a foregone conclusion at this point).

In short, this was a week that investors saw some hope that we may be nearing the end of the worst case scenario.  If this turns out to be true, the markets will continue to rally.  If these hopes lose traction – either because of a resurgence in virus cases or because it becomes apparent that the economy will not bounce back as strongly as hoped – prices will suffer.

In our TSP Watchdog database we did NOT have any trend changes this week.  I was actually quite curious as I tallied the market activity for the week – whether the huge surge would be enough to change any trends.  IT WAS NOT.  All the TSP funds remain on negative trends.  We are 100% in the G fund in all our model allocations.

Two questions we have received recently:

1.  The F fund has performed well over the past year – how/why is it still on a negative trend?

We have not recommended the F fund because it is an income vehicle, and beyond just our trend analysis for income funds, we have an absolute yield comparison that we perform.  When the F fund is yielding less than 1.50% more than the G fund, we deem the risk of higher interest rates too great to recommend the F fund.  Because the F fund will lose value in a rising interest rate environment, and the G fund will not, we prefer the G fund when the difference in yield is less than 1.50%.  Why risk capital in the F fund when we can get “close enough” returns from the G fund with no risk?

2.  Shouldn’t we have some money in the C, S and I funds now – so that we can participate in rallies like we saw this week?

NO!  Times like this are characterized by extreme volatility – both UP and DOWN.  Because strong moves in both directions occur from day to day, it is impossible to participate in just the UP days while avoiding the DOWN days.  Thus, is order to avoid the DOWN days, we also miss out on the UP days – they are a package deal.  You cannot have one without the other.

At the end of the day, we will be happy to avoid much of the volatility – and have preserved capital that we can put to work when the trends change back to positive and participate in the eventual market recovery.

This is not a process of being perfect.  We just want to avoid more downside than upside we miss.  We are already well on our way to achieving this – as our recommendation to sell everything on Mar 2 has us well ahead of just riding things out in the C, S and I funds – even with last week’s big rally:

C fund                   we’re ahead by 10.54%

S fund                   we’re ahead by 20.53%

I fund                    we’re ahead by 14.33%

The C fund has held up better than the S and I funds because it is composed of the biggest, strongest companies in the US.  There is less concern (now) about these companies being impacted for the long run by the economic catastrophe caused by our reactions to Covid-19.

Bottom line, we’ve avoided more downside than we’ve missed upside.

And, we will alert you when the trends do change back to positive – to help you distinguish between a suckers’ rally and an actual trend change.

Especially now, please feel free to reply to this email with questions.  We are here to help any way we can.

Scot B.