TSP Returns Down in December as Fund Returns Reflect Economic Changes

Monthly FRTIB Meeting Reports: Meeting IRS Reporting Requirements

At the monthly meeting of the Federal Retirement Thrift Investment Board (FRTIB), it was reported that the Thrift Savings Plan (TSP) now has more than 7.2 million accounts. This is a new high for the nation’s largest retirement plan which now has $986 billion dollars in total assets.

The TSP also reported that withdrawals from the TSP processed through December 27 will be reported to the Internal Revenue Service as income for 2024. Withdrawals processed after that date will be reported as income for 2025.

The TSP has also processed the remaining required minimum distributions (RMD) for 2024. Participants 73 and older avoid unnecessary penalties from the IRS when these RMD’s are completed on time.

Economic Changes Impact TSP Returns

Big economic changes sometimes become apparent all at once, even though the underlying actions have been in play for some time. We are now seeing some underlying economic changes making headlines.

The stock market dropped dramatically this week.

Stocks and bonds sold off after the Federal Reserve ended its policy meeting with new economic projections that point to a slower pace of interest-rate cuts in 2025 than were previously forecast.

In other words, the Federal Reserve appears to admit it underestimated the strength of inflation in our economy.

Not only did the Federal Reserve lift its outlook for interest rates in 2025, but its members also expressed doubt that inflation will return to the 2% target in 2025. As recently as last September, there was confidence that inflation would return to the 2% target.

Investment markets were paying attention. Bond yields went up and stock prices went down. The Dow Jones average fell 2.58% in one day, and the S&P 500 fell 2.9%. The 10-year Treasury went up to 4.52%.

As the Wall Street Journal noted: “This isn’t your grandfather’s stock market.”

Extreme trends in the stock market have become more dominant. Seven companies: Apple, Microsoft, Amazon.com, Alphabet, Meta Platforms, Tesla and Nvidia, now make up about a third of the S&P 500 index. This is larger than at the end of 2023 when they made up about one-fourth of the index.

BlackRock plays a significant role in the TSP. BlackRock and State Street manage a large portion of the TSP’s assets with BlackRock having the largest share. They invest TSP assets in various index funds, which determine the returns for TSP investors. BlackRock recently made this projection:

We have argued since 2020 that we are not in a business cycle. Historical trends
are being permanently broken in real time as mega forces, like the rise of
artificial intelligence (AI), transform economies. The ongoing outsized response
of long-term assets to short-term news shows how unusual this environment is.
We stay risk-on as we look for transformation beneficiaries – and go further
overweight U.S. stocks as the AI theme broadens out. We have more conviction
inflation and interest rates will stay above pre-pandemic levels.

In other words, there have been big changes in our economy. Large megacap companies have become more profitable because of economic trends. There are fewer high-quality small companies now traded on stock exchanges. The return on assets for small companies was slightly below the S&P 500’s two decades ago. Now, the return for small companies is at a third of the return on assets for the biggest companies.

TSP Returns So Far This Month

There has been a turnaround since the end of November in stock prices. While the year-to-date returns are still very good, the analysis above is reflected in TSP Fund returns.

The S Fund is down 6.81% for the month so far. The C and I Funds are also down but their monthly decline is less than the small company fund. A return of almost 25% for the year (C Fund) is excellent. The return for the S Fund for the year is 17.23% which is also good. Whether it will turn around again by the end of the month to posts a higher yearly gain is anyone’s guess.

TSP Fund Returns in December and Year-to-Date