Thrift Savings Plan investors, like other Americans with investments in the stock market, have been feeling shell shocked over the past two years with the C fund dropping about 37% in 2008 and the I fund dropping more than 42%.
Some may be wondering if this is the worst performance ever for the stock market.
If you look at the Dow Jones Industrial Average, which is the most commonly cited statistic for the stock market, the answer is "no". In fact, 2008 comes in third. In 1931, the stock market dropped 52.67% and in 1907 it dropped 37.73%. In 2008, the Dow Jones average dropped 33.84%.
More recently, the stock market has been going back up–as you have undoubtedly noticed if you follow your TSP balance on a regular basis.
The biggest percentage gain for the stock market in 2009 was on March 23, 2009. On that date, the market went up 6.84%. That is a long way from a record increase. In fact, it comes in at about number 20 on the list of daily record returns. Back in 1933, the market went up more than 15% in one day.
It isn’t a big surprise to see the largest drops in history and the largest gains in history coming in the 1920’s and 1930’s. What is more disturbing to see records for stocks in the last two years mixed in with the stock market volatility of the depression era.
With a rapid rise and fall of the stock market, it is a relief, if only temporary, to see that TSP funds have taken a big jump in recent weeks.
The big winner since March 1st has been the S fund. It is up about 26% through April 22nd. The C and I funds are also up significantly with gains of about 21%. That sounds good (and it is) until you consider that the C fund is still down almost 6% so far in 2009 and the I fund is down more than 9% so far this year.
The current stock market seems to be eerily similar to the stock market’s performance in 1938. In that year, after hitting a bottom in the spring, the stock market went up 62% in seven months. If the current run continues, you will add significantly to your TSP portfolio in the next few months.
The current stock market run is impressive and we may be on track to go up significantly from the current stock market level.
But here is another indicator that predicting the future of the stock market is tricky–and probably impossible. While the stock market closed at just above 154 in 1938, the depression did not end. In fact, the stock market closed lower in 1942 than it did in 1938.
In 6 of the 12 years of the Great Depression, the stock market actually went up. This happened even though unemployment continued to rise, home foreclosures were going up and Americans were losing their homes (or farms were lost as we were still largely an agricultural society).
Most readers were not following the stock market in the 1930’s. Most of us have seen pictures and read about it but may not be that knowledgeable.
Since it is our money at stake, looking closely at the performance of the stock market in that period may be useful–and probably surprising.
President Franklin Roosevelt is often given credit for ending the depression through his "New Deal" policies. The years of 1938-1942 followed the implementation of President Franklin Roosevelt’s "New Deal" which actually began in 1933 followed by the "Second New Deal" that began in 1935.
Even in retrospect, it is not possible for agreement on why the stock market continued to fall with the large infusion of government money into the economy. Some have argued that the infusion of money and expansion of government prolonged the depression and that it wasn’t until the World War II draft that the economy rebounded and unemployment went down.
As Secretary of the Treasury Henry J. Morgenthau testified before the House Ways and Means Committee in 1939: "I say after eight years of this Administration we have just as much unemployment as when we started… And an enormous debt to boot."
We don’t know if today’s stock market will continue as it did in 1938. If it does, the rest of this year will be good for stock market investors.
We also do not know if the trillions of dollars being spent as a result of the new budget package and the stimulus plan will lead to the same results as we went through in the 1930’s. Certainly, all taxpayers hope that will not be the case.
Perhaps it is your view that the large spending about to enter our economy and the government action with regard to banks and large companies is a good idea and will end the economic problems. Perhaps you think that the spending and government intervention in the economy will delay a recovery or create a state-run economy that will create a new depression.
Regardless of your personal political philosophy, you need to be careful in your investments to protect your financial future. Those who take all of their money out of the stock market, may miss out on spectacular returns of the market rebound continues as it has in the past few weeks.
On the other hand, those who are very optimistic and put all of their money into the stock market could find that the market takes another downturn as it did after a significant increase in 1938. The F and G funds of the TSP will provide a safety cushion of that should occur.
Whether you love or hate the passage and implementation of the current economic plans underway, keep your emotions in check until you vote in the next election. You need to protect your own personal financial future. You are responsible for making your own financial decisions. But, when making those decisions, keep in mind that the future does not always follow the path you think it will and make your investment decisions accordingly.
