Hi everyone - It's your govloop weekly dose of TSP Talk from www.tsptalk.com.
Last week was a volatile week for the stock market and a strong finish on Friday solidified some decent gains for both the major indices, and the TSP stock funds.
The C-fund closed up 2.33% for the week. The S-fund gained 1.64% and, with the help of weakness in the dollar, the I-fund led the way with a gain of 2.38%.
The slow and steady G-fund added its typical fractional gain (+0.06%), and the F-fund had a nice week adding 0.48%. All green.
As great as that sounds, and as encouraging as some of the positive signs we are seeing in the economy, I am still concerned that this rally could be running into trouble.
As you probably have heard, the U.S. dollar has been in quite a tailspin for some time now. When the value of the dollar goes down, it makes things that it buys more expensive, assuming the worth of the item you are buying remains stable. It's a major reason why we are seeing the price of gold go up, for instance, but it is having a similar affect on stocks.
We've talked about this several times in our daily market commentary, but for those of you who may be reading this on a website other than TSPtalk.com and may not have seen this inverse correlation between the value of the U.S. dollar and the price of the S&P 500, it may be an eye opener.
Chart courtesy of www.decisionpoint.com
Seeing this may lead you to believe that we might actually want to see the dollar continue to lose value since it appears that stocks do better when the dollar goes down, but remember, we had said that a weak dollar makes the cost of buying things that remain stable in worth go up.
When stocks can start moving higher while the value of the U.S. dollar stabilizes and / or also starts to move higher, that's when I will believe that the value of the stock market is actually increasing during a period of economic expansion. Until then, it is difficult to trust that this rally can be sustained for the long-term.
If this inverse correlation continues, and we aren't really seeing any evidence that this will change any time soon, you might notice that the chart of the dollar may have found support in the 75.0 area and if it holds, could produce a double bottom affect that could trigger a rally (for the dollar). Unless is it caused by a major positive change in the economy, this would not be good news for the stock market as you can also see the corresponding double top on the S&P 500.
The market has had a huge surge off of the bottom of the bear market back in March and certainly this was not all a result of a weaker dollar. Stocks had become cheap and the market had priced in almost a complete collapse of our financial system, which was an overreaction. The market went down further than would seem reasonable, but it always does that - just as it always seems to move higher than you'd expect during a bull market. I suspect we could be getting closer to that point now. I can't say exactly when stocks will finally run out of steam, but I can say that most average, uninformed investors will wonder what happened when it does goes down. They are usually the last to know.
Good luck, and thanks for reading! We will be back here next week with another TSP Weekly Wrap Up.