It has been a volatile couple of months for the federal Thrift Savings Plan (TSP). And, for better or worse, TSP investors were not sitting still.
For July, the TSP stock funds were down for the third month in a row. And, early in August, the stock market experienced extreme volatility. As is usually the case when there are extreme gyrations in the stock market, there was a whiff of financial panic in the air.
Flight to Safety
In July, the Thrift Savings Plan G fund hit a new monthly record: Almost $5.6 billion was transferred into the G fund. At the same time, more than $2 billion was transferred from the C fund; almost $1.6 billion left the S fund; $180 million was transferred from the F fund and over $1 billion was transferred form the lifecycle funds. The most logical explanation for the move into the G fund was a “flight to safety” of the G fund.
Debt Ceiling and the G Fund
But, for those paying attention, the G fund was also in an unusual situation. As we noted in July (The “Debt Issuance Suspension Period” and $186 Billion of Your Retirement and TSP Funds), the Treasury Department was using funds from the G fund to help pay government operating expenses while the debt ceiling limit was being debated. As of June 30th, the amount in the G fund was down to $27 billion from approximately $129 billion in April. And, by the end of July, the amount in the G fund was down to about $9.8 billion according to Treasury Department reports.
Since the debt ceiling was raised in early August, the money (or at least the government securities that count against the debt ceiling) has reportedly been put back into the G fund along with any interest that was due.
That is exactly what has happened in previous years when a similar event occurred and it is what the TSP’s director of external communications had assured investors that would happen this time as well. The difference in this year’s event is that the amount of the federal debt has been setting new records and literally going up by billions each day and has attracted the attention of the American public as candidates are already revving up for next year’s national elections.
There is increasing worry in the financial markets about the amount of government debt being assumed by the United States as well as other countries. And, while the social and political unrest has not been as extreme in the U.S. as it has in Europe, there is more political tension now in the U.S. than we have experienced in many years as the American public has become more concerned about the debt the country has assumed and the results of Congressional elections in November 2010 has many now in office on edge and concerned about their own political futures.
With the unstable economic and political climate, the downgrade of the American credit rating, high unemployment that has persisted for several years, national elections coming in 2012 and already dominating the much of the news on cable news programs, investors are insecure and the gyrations in the stock market reflect this uncertainty.
Despite the wild ride, after the stock market closed on August 15th, the market ended up just ahead of where it was on August 5th, just before the U.S. credit rating was downgraded.
Those investors that take some risk and guess (or analyze) correctly, will probably end up ahead. Many TSP investors will stick with the relative security of the G fund. The ratio of debt to the gross domestic product is high and going higher in the U.S., Europe and Japan. Some analysts think the market swings are a “crisis of confidence” in political leadership. There is also fear of another recession and a number of reports that the recession has never really ended as the “growth” in the U.S. economy has been the most lackluster after any recession since the end of World War II.
What will happen during the rest of the year is anyone’s guess. For a variety of reasons, there is little to indicate a dramatic rise in the U.S. economy or consumer confidence in the near future. For those current federal employees planning to retire in the near future and to use the TSP for their financial security, chances are most will err on the side of conservative investing while those with a decade or more before retirement may view the current market as a chance to buy stock funds that may appreciate significantly before they leave government service. No doubt, many who had planned to retire by now are still working as they wait and see what their financial situation will look like a few months from now. (See “Changes in Latitudes, Changes in Attitudes:” The Elusive Retirement Tsunami)
Enjoy the ride. There are likely to be more significant swings in the coming months.
