Hope in Recession?

August 02, 2022

Welcome to August!  Yet another interesting, and I’m happy to say, positive month.  The simple investment advisors that adhere to the “Sell in May and go away” would find themselves missing out on an incredible rebound from the lows earlier this year.  In short, you cannot “go away”.  You must actively manage your investments, but you should also not over manage them either. 

So, this month we saw great returns across all funds with the S Fund leading the way at over 10%.  This is the best July for the S Fund since I started my system in 2004.  The S Fund has only been higher on a monthly basis 6 other times since then as well.  Of course, I did not invest in the S Fund.  This kind of volatility is what causes my system to downplay the S Fund in its current state.  It is still down over 20% for the year whereas the C Fund is down a little more than 12.5%.  The C Fund’s July performance has the same statistics as the S Fund however, with the highest performing July and the 5th highest performing month since 2004. 

However, I’m not thinking this is a recovery.  I think it is hope returning to the system.  For far too long, our economy has been divorced from real earnings and a true understanding of inflation.  The Federal Reserve has not been saving up for a rainy day (interested rates in the 2-2.5% range), and now that they are tightening, the US will be able to better withstand the coming (or current?) recession.  Yes, as I predicted in my last several posts, I knew we were in a recession, we just hadn’t declared it yet since it takes two successive quarters of negative GDP to be declared (this is the technical and widely agreed to definition, no matter what anyone says).  So, with hope returning to the system, investors will be able to use earnings, company performance, WACC (weighted average cost of capital), and other factors to more accurately value a company and its stock price.  We still have a long way to go before this becomes a reality, but this is what I am seeing in this market rebound in the face of a recession.

For the next 2-3 quarters, we are going to see a shift in the job market (less job openings), less borrowing, and the effects of negative growth.  Companies will be trimming the fat where they can, and companies that relied upon easy capital for internal projects or from consumers will find those wells have dried up.  This points to a flatter market as a whole with the C Fund companies on the plus side and the S Fund companies closer to flat (despite this month’s performance).  I’m still long on the C Fund and think the benefits of returning the economy to a level of less exuberance will benefit the C Fund more than any other TSP Fund.  Keep investing!