Multivariable Calculus
Welcome to September and Happy Labor Day! We had a great month with all funds positive, with the S and I Funds leading the way. Unfortunately, while my TSP Coach returns are still solid for the year, up over 8% through August, we are behind all the indices. I’ll admit that this is an off year for TSP Coach. It is incredibly difficult to understand all the dynamics in the market when all the variables are changing at the same time. The I Fund has had a year like no other since 2006 when compared to the other funds (massive returns and beating C and S Funds). The C and the S Funds are moving along at a pretty average pace compared to previous years with an average of 1–1.2% per month. I cannot and do not seek to time the market, but this year, timing has hurt. I cannot be disappointed with an 8% return by August as I have mitigated my risk, maybe a bit too much, and I will continue to be careful in my allocation decisions—too many variables are still at work.
I’m watching 3 major areas for the next 3 months.
First, Federal Reserve interest rate cuts. Most of you have probably seen the news about President Trump's attempted firing of Lisa Cook, which she is challenging, potentially opening up a position for another Trump-appointed governor. Many think he will stack the deck with someone that will cut interest rates. Maybe he will, but a nomination and their impact will not affect rates in the coming months. However, I think the argument has been made that with an adjustment of standard inflation rates to 2.5%, a weak but positive job market, and high home interest rates, the Fed will cut rates in September. This is probably already priced into the markets and thus could actually have a negative effect on the C and I Funds. However, these bumps in either direction are likely short-lived (2 weeks) and other factors will take over. Look for this news September 16-17 and impacts to be seen the rest of the month.
Second, I’m watching the tariffs, as always. I do not think we are going to see the full 0.5% GDP haircut. As more nations come to the table and negotiate deals, lowering their tariffs in exchange for investment in the US, the offsets will start to be realized. We are 4 months into the tariff war and prices have not gone haywire. Additionally, they have been staggered and companies are realizing they have to cut their prices to still remain competitive in the US if they have to pay the tariff, so consumer prices have remained flat (not counting normal inflation impacts of course). I see a return to normal by the beginning of next year as the tariff dust settles and with that more certainty in the market.
Finally, I’m closely watching the Chinese economy and its political situation. Lots of information is coming out about its poor economy and President Xi’s remaining political future. An unsettled China can have so many impacts across so many areas it is hard to quantify. Although they aren’t a major consumer of US manufactured goods, many US companies derive a significant portion of their income from sales in the Chinese market. However, counterfeit Chinese goods, a significant strain on US businesses, could be reduced, giving smaller companies more breathing room and trade space. Finally, if Xi is replaced, the direction that China and the CCP wish to head could make the world a lot more or less interesting, if you read between the lines. I recommend everyone take a look at the China Show and the China Observer for some quick updates.
I’m still strong on the US economy and with a rate cut potentially already priced in for both the US and I Funds, I’m staying close to where I have been. The I Fund still benefits from lower interest rates in Europe and elsewhere. Keep investing!
