The best antidote to the current stock market might be Dramamine, the ups and downs being enough to give anyone motion sickness, not least the federal employees. Here on the Federal Drive with Tom Temin, Certified Financial Advisor Arthur Stein wwith some sstrategic advice.
Tom supply: And kind of, it goes up, it goes down, day after day. The other issue I think we should be talking about is the fact that the bond market, at least for now, is no longer a great antidote to what’s happening in stocks.
art mug: Yes, what’s really unusual about this year isn’t the magnitude of the stock market declines. It’s the magnitude of the bond market declines. And that could be the worst bond market returns I’ve seen in maybe the last 40 years, or maybe in the history of the United States, or going back to the 19th century. But it was terrible. And just as an example, the F fund in the TSP, which is based on a bond index that includes US bonds, Treasuries and also corporate bonds, is down 15% in the last year, which is pretty awful.
Tom Tem: Now, what drives bond yields?
art mug: Bond yields are pretty complicated. But basically the Fed is raising interest rates. And that makes existing bonds less valuable because they carry a lower interest rate. And that’s pretty much pushed the values of existing bonds down.
Tom Tem: And could investor confidence in the value of corporate bonds also be lower?
art mug: It’s certainly possible, Tom, because people are anticipating a recession. And during a recession, more companies than usual will go out of business. But we’ve also seen big falls in US Treasuries. And people don’t worry about these being paid back, these are complete and considered 100% safe. So it’s more interest rate hikes than anything else.
Tom Tem: Because there is also the factor of municipal and government borrowing, as these entities cannot fund themselves into deficits. They do this by issuing bonds.
art mug: Well, municipal bonds, you know, some of them are guaranteed by the issuing state or municipality and some aren’t. So municipal bonds might not pay off, they might go bankrupt. I don’t know if you remember, but a long time ago there was a major utility collapse in Oregon or Washington state. It was a nuclear power plant and it went bankrupt and all the bondholders lost all their money. And that was a municipal bond.
Tom Tem: You could literally call it a bond meltdown.
art mug: Well said Tom.
Tom Tem: And of course, investors, individual investors, especially those in the TSP, where it is managed very carefully, have always well reckoned when the stock market is weak to switch more to bonds and vice versa. And that typical strategy doesn’t seem to work these days, does it?
art mug: Well it’s not working this year, last 12 months. And there certainly have been times in the past when it hasn’t worked, because it’s not a given that when the stock market goes down and the bond market goes up, people will switch their money to bonds. I mean it’s not uncommon for that to happen. But it is not a matter of course.
Tom Tem: And do bond prices reflect demand? I mean, stocks go up when a lot of people want to buy them, just like other commodities, but bonds are issued at a certain rate of interest. So is pricing demand?
art mug: Absolutely. Demand pricing affects bond values. A simple example is US Treasury bonds: when the world is in trouble, many people want a completely safe investment. So they reallocate their money or put more into US Treasuries, push up the value of US Treasuries, that lowers the interest rate, which is good for us, it can also affect the value of the US dollar, all kinds of ways Things.
Tom Tem: Let’s hope these people don’t read the Congressional Budget Office reports in the long run. We speak to Art Stein, the Certified Financial Advisor in Bethesda, Maryland. And so the individual federal investor, especially one who thought, “Well, you know, maybe it’s time to think about relying on this TSP as part of my retirement,” should just bury their head in the sand and not look at your portfolio for a few years? Should you change your allocations now?
art mug: Well, when you work, you can afford to bury your head in the sand. And we recommend that people keep investing in the various TSP funds and not just run to the G fund because it’s not down this year, it’s the only TSP fund that’s not quite down. The L funds, the lifecycle funds, are also down.
Tom Tem: But the L fund, some of them are heavily involved in the G fund themselves.
art mug: Yes, but even the most conservative L fund, the L Income Fund, is 76% bonds, about 70% of that 76% is the G fund. But it’s down 3.6% over the past 12 months. I mean the phrase you hear that I end up using a lot makes me angry because I feel so repetitive, there’s no place to hide, everything is down. And that’s why it’s a good time for people to work and invest. Bad times for people who take money from their investments to make a living.
Tom Tem: So short that you’re not trying to pick stocks, which I think most qualified advisors tell people not to try and pick stocks, you can’t time the market. Some people seem to have this talent. But maybe they can also play the violin, I don’t know. But other than that, in a way, it’s a good time to keep this regular allocation of your income to your investments, since your income, on average, is what you buy. And if you believe in the system, eventually it will go up. In other words, you don’t want to sell out and sell low now and then chase later.
art mug: Yes, we recommend that people don’t sell because the market is down, which is what you actually want. This is historically a good time to buy.
Tom Tem: Good. What other advice do you have for people right now?
art mug: You know, I think you need to think about your stock investments. The equity funds in the TSP are a long-term investment. And you know, once interest rates stop falling and stabilize, we’re hoping that bond funds come back very strongly.
Tom Tem: And for those of us who remember 1987, when you had a serious market setback, it doesn’t look quite as bad as it did then, either.
art mug: no Again, for bond investors and bond investing, this is the worst it has been in at least 40 years. For stock investors. It doesn’t even come close to the biggest declines. I mean we were down 25, 30% in 2008 depending on the timing and circumstances when the C Fund was down 55%. The S fund was even worse.
Tom Tem: Yes, the cable networks ran the tickers on their crawlers, the tickers on the crawlers, to show you that the market is declining by the minute. You don’t see it this time.
art mug: Yes. And if you look at the market declines by the minute, you’re only going to get yourself into trouble.
Tom Tem: Art Stein is a certified financial advisor based in Bethesda, Maryland.