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January 29, 2023

Federal Employee Retirement and Benefits News

Category: Thrift Savings Plan (TSP)

Is TSP 2020 the Scariest Roller-Coaster Ride or a Merry-go-Round? By: Marvin Dutton

The ongoing world economic crisis due to the coronavirus outbreak reminds everyone of the recession that clobbered the economy in 2008-2009. During that period, hundreds of thousands of federal employees and near-retirees extracted money from their dropping stock-market funds, such as C, S, and I funds. They transferred them to their Treasury securities G fund. Many of them never thought of returning to stocks even if they became expensive during the historic 11 years of the bull market. Many who left the stock fund for the Treasury securities believe that they did the best thing. Many who were still investing in the stock-indexed funds while the stock market was plunging thought they did the right job when they refused to sell their shares when they were dropping and continued to invest when they were available on sale.  

According to you, who did the right thing then? Let us ask this question of Abraham Grungold. Abraham Grungold is a long-term federal employee and a successful investor who now is a financial coach. We asked him why he’s sticking with the stock market. He replied and said it is like riding on a very steep roller-coaster. Here’s how he analyzes the situation as a deferral employee and a financial coach:

 

TSP 2020 is like a very steep roller-coaster ride that is the scariest ride of all

During his 34 years of service, he tried and tested Thrift Savings Plan roller-coasters. The TSP roller coaster is a ride for TSP participants who are investing their money in the C, S and I funds. The TSP participants who are investing in Treasury securities, or the G fund, are riding a merry-go-round. They are at no risk and merely enjoying their investments. 

During his service, he took many federal furloughs but had never seen any long-term effect on the financial markets. Though new, it lasted for a short-duration and was overrated. After that ride, the TSP funds returned with a more substantial investment. The financial crisis of 2008 lasted longer, and he had to ride on that TSP roller coaster ride for a long time. While on that ride, it seemed like it would never end. The journey continued for years, with many ups and downs along the way. After that ride ended, the TSP returned and became more reliable than ever.

Now, this TSP 2020 roller-coaster ride is the scariest ride of all uncertainties, and the biggest fear is in the first drop of this ride. The first drop resulted in the TSP’s depreciation by 35% within a short few weeks. By depreciation, we mean a decrease in value, not any loss. The financial crisis of 2008 dropped the TSP account to 40%, but that was a progressive one that stayed for the 2008 to 2009 period. This year’s TSP roller coaster brought an immediate significant drop that is not acceptable. It is a steep and very volatile ride. Each hill and valley of this ride comes with a 5% inclination and 10% drops in my TSP, says Abraham Grungold.

He gave us some survival tips for this ride. Let’s have a look: 

He applies a simple approach to each ride he takes. He takes a deep, calming breath and stays there with both hands in the first drop. Sometimes, he prefers closing his eyes. That means closing his eyes to the financial news because watching the financial news during a financial crisis can only increase stress and anxiety and worsen the situation. During all of his rides, he continues his contributions into the C fund and avoids watching the financial markets. He always focused on his federal career and enjoyed time with his family. His TSP account has increased by 20% already and he expects that this ride will last longer than other rides, but yes, the market will return stronger than before again.

So, what does he advise participants to do who only invest in the G fund during their fed career and in retirement? His reply is simple: Some people like to go on merry-go-rounds, and some love steep roller-coasters. People who love taking risks like Abraham Grungold will always ride on a TSP roller-coaster during their career and into retirement. No matter which type of ride you take, the most important thing is that you should feel comfortable with whatever you are doing, and it should be enjoyable. The money is yours, so the decision to invest it should rest in your hands only. 

TSP Approves Budget for 2022 Fiscal Year. By: Aaron Steele

On Tuesday, August 24, 2021, the Federal Thrift Investment Board approved its 2022 budget. The new budget is $496.8 million, a slight decrease from the $498.4 million that the board approved for the 2021 fiscal year. The board oversees the Thrift Savings Plan (TSP), a retirement savings plan scheme for federal employees. 

The board made the decision during its monthly meeting on August 24. Ravindra Deo, the board’s executive director, explained that the 2022 budget is the second-highest spending plan since 2020. The board has been spending more on projects since 2020, but the 2021 budget has been the highest spending period so far. 

Deo explained that the board aims to focus more on the TSP and its participants over the next five years. The executive director added that the board had been more focused on technology and cybersecurity over the past five years. However, it has more confidence in the progress it has made in those areas over the years. The board members will now prefer to focus more on the agency and the participants of the scheme. Deo added that TSP participants should expect better services from the board. 

The TSP has had a three-year spending uptick period. A part of the focus is the agency’s project Converge. The project is geared towards helping the agency change its recordkeeping method. Converge is expected to take effect in 2022 and will allow for better services, including services that participants have been clamoring for, such as a mobile application and access to mutual funds.

Apart from Converge, the board is also looking at initiating other upgrades with the increased budget. Such initiatives will include an upgrade to the agency’s information technology (IT) and financial services management. In about two years, the executives of the board predict that the agency’s funding will fall to about $445 million. 

More people are expected to join the savings scheme, and this, Deo said, will reduce the budget’s cost to each participant from $79 to $57. Deo said this change is expected to take place in 2026. According to the executive director, next year’s budget is 6.8 points, but that of 2026 will be around 4.5 basis points. The basis points, measured in ratio or percentage, compare the agency’s budgets to its assets. 

Deo also explained that the board would determine the success of each project by examining how fast employees learn the new systems. The executive director added that the new model would pose a new challenge for employees, who need to evolve and adapt to it. Deo also maintained that the participants remain the priority even as the agency adjusts to the new changes.

Social Security Benefits Might See the Largest Increase Since 1983

Seniors and disabled workers may see the largest increase in Social Security payments in decades next year due to high current inflation rate.

According to a Bank of America analyst’s report, beneficiaries’ payouts may climb by 5.8% in January 2022, the largest increase since 1983. That’s also a significant rise above the 1.3% boost to the cost-of-living adjustment (COLA) in January 2021, which was insufficient to keep up with this year’s inflation rate.

In June, the Bureau of Labor Statistics’ Consumer Price Index (CPI) – a significant indicator of inflation — increased by 5.4% from the year before, the highest increase since August 2008. Some of the most important price rises were associated with travel, automobiles, and everyday products such as washing machines, bacon, fruit, and milk.

The note stated that this has significant consequences for retirees and disabled workers receiving Social Security and SSI benefits. It implies their finances are being pinched right now but will increase significantly next year.

According to Bank of America, that rise would equate to more than an extra $80 per month in benefits, a fourfold increase over the extra $20 beneficiaries received in monthly benefits this year.

With more Social Security money to be distributed next year — and inflation rate in 2022 anticipated to fall to 2.3% — there will be an “$80 billion or more swing” in net tax benefits, which will help maintain the recovery into next year, as reported by Bank of America’s analysts.

Seniors and the disabled will contribute to keeping the economy hot, said the note.

The Social Security Administration has an ultimate say on benefit increases since it still needs three more months of data before determining the official COLA percentage.

COLA is calculated using CPI data fluctuations, especially those classed as urban wage earners and clerical employees. In October 2020, a comparison was made between the previous year’s third-quarter CPI snapshot and the current year’s third-quarter data; if any, the change in growth determines the adjustment.

What to do When the Stock Market Plunges?

For a long time, investors in the TSP stock index funds (C, S, and I) have done exceptionally well.

Since the Great Recession ended in mid-2009, the market has had its ups and downs (but largely ups). Most people didn’t see it coming, and even fewer realized how or when it would end. Till after the fact, when investing your retirement nest fund isn’t really helpful.

In June 2021, the market reached an all-time high. Since then, there have been ups and downs as investors await what the FED will do (if anything) and what the newest COVID mutation will do to the mainly unvaccinated in regions like Africa, India, or more locally, in Missouri and Los Angeles County.

Most of the TSPs’ 98,000 millionaires reached a seven-figure level by investing for the long term (an average of 29 years), mainly in the C, S, and I Funds. Also, by remaining in stocks and purchasing through difficult times, such as the Great Recession. Here’s a complete breakdown of the TSPs’ composition as of June 30.

However, there’s always something, right? So, let’s look at a text by financial planner Arthur Stein:

TSP Stock Funds Rose To All-Time Highs In 2021’s First Half

The TSP stock funds’ (C, S, and I) share prices reached new highs in the second quarter, owing to a significant drop in COVID-19 cases in the United States, increased vaccinations, economic re-openings, low-interest rates (as a result of the Federal Reserve’s Quantitative Easing (QE)), and fiscal stimulus sparking an economic surge. On June 30, C Fund share prices reached an all-time high. The S and I Funds had reached their high a few days earlier.

Total Return for the period is calculated using the YTD and 1-year returns. Compound Annual Returns are computed for one, three, five, ten, and fifteen years. This is solely for illustration purposes. An investment in an index cannot be made directly. Past performance isn’t a guarantee of future results. All investments have several risks, including capital loss and volatility. Returns are rounded to the nearest tenth, and they include all income reinvestment but don’t include taxes. Bond funds didn’t fare as well. The F Fund fell 1.5% in the first six months of 2021, while the G Fund rose only 0.6%. Bond fund returns were lower than the inflation rate.

Market Outlook

There are several risks associated with current TSP Fund values, including:

  • A COVID reemergence,
  • Modifications to Federal Reserve monetary policy (QE),
  • Reductions in government stimulus (fiscal policy),
  • Wars, revolutions, terrorist attacks, natural catastrophes, and so on.

These and other dangers have prompted some analysts to forecast severe market losses in the future.

That’s hardly much of a prediction, is it? Market losses are unavoidable at some point. Falling markets (Bear Markets) eventually follow rising markets (Bull Markets). Unfortunately, we don’t know (and analysts, economists, and market experts cannot predict) the timing, length, or amplitude of future Bear and Bull Markets.

As a result, stock and bond market forecasts are neither trustworthy nor valuable. We all know that the stock market has gone through Bull and Bear Market cycles in the past. We’re now experiencing a Bull Market. It will eventually turn into a Bear Market. But when will it happen?

Since significant market drops are forecasted to happen at some point, TSP investors should plan what they’ll do if the declines occur.

Bills to keep an eye on: TSP alterations, retirement help for former seasonal federal employees, and others

The Thrift Savings Plan (TSP) is once again in the sights of Congress.

Sen. Marco Rubio (R-FL) proposed a new bill to give the TSP’s board new fiduciary duties.

The Federal Retirement Thrift Investment Board (FRTIB) is mandated by law to operate only in the fiduciary interests of its participants. This bill is known as the TSP Fiduciary Security Act. It would effectively require the TSP to consider potential national security implications when making decisions concerning its funds and participants’ alternatives.

The board has a few concerns about the legislation.

It contradicts the current responsibility to operate purely in the interests of TSP participants and changes the core idea of fiduciary duty, Kim Weaver, FRTIB’s executive director of external relations, said at the TSP’s monthly board meeting last week. It’s worth noting that it doesn’t alter the otherwise identical fiduciary duty that applies to any other 401(k) which millions of Americans use to save for retirement.

Simply put, the bill doesn’t require any other 401(k) plan to modify the way it manages its holdings.

Investments in Chinese firms or others on the Commerce Department’s Entity List are deemed a “breach of fiduciary duty” under Rubio’s proposal. Together with the secretaries of Defense, Homeland Security, Labor, and the Treasury, the attorney general would draft new regulations outlining how the TSP should comply with the new national security matters.

Rubio is one of the several senators who has shown serious concerns about the TSP and its intentions to convert the international fund to a new, China-inclusive benchmark announced last year. As a result of the move, TSP participants would have gained access to big, mid, and small-cap stocks from over 6,000 firms in 22 developed and 26 emerging economies. According to an independent consultant, it would have increased the expected returns for TSP participants.

The previous year’s plans to implement the China-inclusive index have been put on hold indefinitely due to opposition from the Trump administration and a bipartisan senators group, including Rubio.

He has introduced numerous bills aimed at preventing the TSP from adopting a China-inclusive index.

Aside from the TSP legislation, here are three other bills to watch in the coming months.

An attempt to update the ‘Plum Book’

For a second time, House Democrats are attempting to cast more light on the political appointees who hold critical positions in the executive branch.

The Periodically Listing Updates to Management (PLUM) Act was advanced last week by the House Oversight and Reform Committee. The legislation combines two bills, one from panel chairperson Carolyn Maloney (D-N.Y.) and another from Rep. Alexandria Ocasio-Cortez (D-N.Y.).

The legislation as a whole would require the Office of Personnel Management to publish and keep an active register of political appointees online.

It would also require OPM to collaborate with the White House Office of Presidential Personnel to summarize demographic data for those appointees.

Ocasio-Cortez said in a statement that our political appointees must reflect America to address the needs of the American people. The Political Appointments Inclusion and Diversity Act will shed light on who is and is not at the table in our government. By publicly reporting on the appointees’ demographics, we’ll identify where efforts need to be enhanced to ensure that our policymakers are not just talented but diverse and representative of everyone in our country.

The Office of Personnel Management currently collaborates with the House and Senate oversight committees to publish a list of political appointees, called the “Plum Book,” every four years. The data is only current when OPM and the committees prepare and publish the list; it isn’t a real-time record of when appointees come and depart or move into new posts.

Last year, Maloney and Reps. Gerry Connolly (D-VA) and John Sarbanes (D-Md.) proposed the PLUM Act. Senator Tom Carper (D-Del.) proposed identical legislation in the 116th Congress, and the bill passed both chambers’ oversight committees last year.

Former temporary federal employees are eligible for a retirement ‘buyback’

Former temporary and seasonal employees might get another opportunity to make retirement “catch-up” contributions under a bill presented last week by Reps. Derek Kilmer (D-Wash.) and Tom Cole (R-Okla.).

Currently, seasonal and temporary federal employees don’t have the option of making retirement contributions, even though many temporary workers eventually transition to permanent employment.

If they do become permanent employees, they’ll be unable to make “catch-up” contributions that would let them retire after at least 30 years of service, and their time as temporary employees would not count toward their federal pensions.

As a result, Kilmer and Cole have found that former seasonal and temporary employees work longer hours than their colleagues to receive the same retirement benefits. Their bill, the Federal Retirement Fairness Act, would allow former seasonal and temporary workers to make interest-bearing contributions for their service to their annuities.

Kilmer and Cole presented this legislation for the first time in 2019.

The National Active and Retired Federal Employees (NARFE) Association, the Federal Managers Association, and many others have endorsed the bill.

Seasonal and temporary federal employees who respond to the call of duty deserve the same degree of consideration as permanent employees, said Randy Erwin, national president of the National Federation of Federal Personnel. He represents some seasonal park rangers and U.S. Forest Service employees. It is unacceptable to overlook temporary or seasonal labor after individuals become permanent employees, considering that many of these people risk their lives and health for these jobs, as thousands of wildland firefighters do every year. To not count that time on the job is like creating a second class of employees. They deserve to have the time they’ve put in to be counted toward retirement.

Another effort at organizational reform at DHS

Democrats on the House Homeland Security Committee have consolidated a broad list of DHS priorities into a single bill.

The DHS Reform Act, formally presented last week by committee Chairman Bennie Thompson (D-Miss.), is 263 pages long and addresses a wide range of challenges that the department has encountered in recent years. It would:

  • Set restrictions and more criteria about who can serve in “acting” roles at the department.
  • Establish a new assistant secretary post in charge of all DHS law enforcement subcomponents.
  • Appoint the undersecretary for management for a five-year tenure.
  • Arrange the Joint Requirements Council to examine the department’s acquisition and technical needs.
  • Create an annual employee award program and codify a DHS steering committee on employee engagement.

Additionally, the bill would designate the DHS undersecretary for management as the department’s chief acquisition officer. The bill doesn’t consolidate congressional jurisdiction over DHS, as Thompson has sought in recent years.

The department is now required to report to more than 90 congressional committees and subcommittees, which strains the DHS and frustrates politicians and lawmakers who wish to reauthorize the agency.

TSP’s I Fund To See A Much Brighter Future With FRTIB’s Change

In November 2017, the Federal Retirement Thrift Investment Board option to expand its I Fund, which included the following: small-capitalization businesses, emerging markets, and Canada.

You can read the full plan by checking out their November meeting minutes. In a nutshell, the board decided that in 2019 the index the I Fund follows will change. The hope is that this will lead to better risk-adjusted returns for the future.

In June 2017, Aon Hewitt, a consulting firm, had spoken with the board, recommending they make the change. The Board agreed to look at what the implications would be in doing this and would address the matter sometime in the fall.

How Is The I Fund Going To Change?

Should the TSP follow through with this planned change, the I Fund will no longer watch the following indexes – Far East Index, Australasia and the Morgan Stanley Capital International Europe. Instead, the index it will follow is the Morgan Stanley Capital International All Country World Ex-US Investable Market Index.

What will this change allegedly do?

Simply put, it would increase the I Fund’s scope.

For instance, the Far East/Europe index the I Fund is currently following has more than 24 percent of the size financed in Japan, with 17 percent financed in Europe. This is a more than 40 percent investment in two leading countries. The seven countries, comprising of 80 percent of the I Fund index, are:

• Australia
• France
• Germany
• Japan
• Netherlands
• Switzerland
• UK

The I Funds’ All Country index is the one the fund will end up following, which only has between 12 percent and 17 percent invested in both the U.K. and Japan. The other countries make up 60 percent of the fund. By making this change, it would mean exposure would be given to South America and Asia and would nearly double the number of countries it will invest in.

Currently, the Far East/Europe index takes into consideration just mid-to-large-sized businesses, which makes up 85 percent of the respective market capitalizations. The All-Country index comprises any sized company (or 99 percent of the market capitalization).

Everything within the TSP funds, except the G Fund, is managed by BlackRock Inc. The company, along with its iShares ETFs charge about the same expense ratios for Far East/Europe and All Country ETFs, which means there shouldn’t be that big of a change happening to the I Fund expense ratio.

What Will The Value Of Emerging Markets Be?

Obvious changes occurring in the I Fund are the additions of small companies and Canada. However, the most notable difference is the inclusion of emerging markets such as Brazil, China, India, South Korea, Thailand, etc. Up to 25 percent of the All Country index is made up of emerging markets; they are not even considered in the Far East/Europe index.

While the “I fund” was regarded as the best TSP fund in 2017, with 25 percent yearly returns, it narrowly missed a 37 percent returns from the emerging markets in that same period. While the performance change is significant for each index every year, there are some indicators that the faster-growing markets will do well over the next ten years. Investors with no exposure are likely to be disappointed if they don’t invest in them.

The International Monetary Fund expects developed economies will see a two percent or less gross domestic product increase in the next five years. Japan, which is the most significant player of the Far East/Europe index, is anticipated to grow less than one percent a year because of two reasons – aging population and declining population. Emerging markets, however, are likely to develop five percent GDP every year.

PricewaterhouseCoopers believes the same thing is to occur. A look at their 2050 outlook notes that the top seven emerging markets were half the size of the top seven markets in 1995 and are currently the same size in 2015. They are thought to be two times the size in 2040. The reasons for this significant change include rising GDP per capita, larger population sizes, and quick population growth.

Along with all this, the Far East and Europe index have had a seven percent exposure in the technology industry, but the MSCIs Emerging Markets index has seen a whopping 27 percent exposure. Thus, the joint All Country index has had a 12 percent exposure to the technology sector.

Adding these economies to the “I fund” would ensure similar effects – the exposure of the technology industry would double.

With exposure like this, one would assume emerging markets would be valuable. In 2007, that happened. According to many metrics like the market-capitalization to GDP- ratios and price-to-earnings ratio, this market would be far more valuable than European or U.S. stocks.

While the yearly returns for the emerging markets haven’t done so well, their corporate earnings and economies have grown. Still, it appears investors see flat returns.

As it stands, emerging markets are still rather valuable even with higher growth expectations for the long-term. Of course, they don’t follow the same indices as other markets, and they trade at lower values than the markets in the U.S., gauging by price-to-book and price-to-earnings.

Developed international markets have similar low values but have extremely low growth in earnings.

The MSCI indices have comparable numbers, with emerging markets seeing low assessments and quicker anticipated growth than international and U.S. stock markets.

What Does It All Mean?

While investors should have international exposure, the kind of index they follow plays a massive role in how well or poor their investment is. Most of them don’t understand how intense the international funds are.

Look at the current set up of the I fund shows that it’s reasonably valued for the short-term, but, looking at the long-term view, it’s liable to miss out on worldwide growth. The heavy concentration of the I fund is focused in Europe and Japan, and adding the emerging markets, Canada, and small companies changes it very little but could have a tremendous impact in the long range.

With the FRTIB’s choice to use the All Country Market Index, the I Fund is going to see more exposure to geographic diversification and worldwide growth. Thus, TSP investors may end up with a much brighter future.

Congress Makes Some Changes To TSP With Modernization Act, Still Misses Opportunity To Improve It Further

What Does the TSP Modernization Act Mean?

A significant number of federal employees are using the Thrift Savings Plan as their key retirement savings account. After all, it comes with easy-to-comprehend market indexes with little fees. It allows them to match funds, make secure contributions and lower costs – all of which have helped millions of federal employees use the TSP to boost their nest egg.

The TSP, on the other hand, has not been great for retirees who want to use the money for retirement expenses or income. The complex distribution rules have countered the simplicity seen in accumulation. The regulations have created some confusion for federal employees.

Congress has attempted to deal with these issues by signing the TSP Modernization Act into law. This act will go into effect in November 2019 and has some intriguing improvements for TSP participants.

Unrestricted In-Service Withdrawals Starting AT 59 1/2

As it currently stands, federal employees can make a single in-service withdrawal from their TSP after they hit 59 1/2. The possibility gives impending retirees more options for retirement transition along with putting together meaningful distribution plans for the future rather than waiting for retirement.

The great news is that the option is even better. With the Modernization Act, TSP participants can do an infinite number of in-service withdrawals when they turn 59 1/2. This means they can successfully use their money to ready themselves for retirement, transferring it to a Roth IRA and carry out a post-separation plan.

Unrestricted Post-Separation Withdrawals

With the TSP Modernization Act, federal employees can withdraw their money from their accounts during retirement. Thus, they’ll be able to use their money without any restrictions. Some restrictions that were not taken care of include:

Restricted Number of Choices

The key funds of the TSP stay the same. The funds are low-cost, but the plan’s choices are not what is seen with others, not in the TSP. These choices don’t include market indexes that tie to key asset classes like commodities, emerging markets, long-term bonds and real estate. With five funds offered, the choices are easy but do restrict people from implementing a highly-diversified portfolio.

It’s a bit of a surprise Congress didn’t improve the TSP funds, especially since companies have determined how they can offer an array of options for a low fee.

RMD on Roth TSP

The TSP’s Roth part will still be subjected to the Required Minimum Distributions. For people to avoid this requirement to withdrawal when they turn 70 1/2 is to let the money go into a Roth IRA. Doesn’t seem right and counterproductive to force withdrawals from tax-free accounts.

TSP Annuity

This kind of annuity won’t change. The TSP annuity is considered an immediate annuity, which demands that complete surrender of the principal be made for assured income. This option isn’t that good for a retirement plan as they rarely evolve. TSP participants would be better off finding other annuities that offer some flexibility.

What Does It All Mean?

The TSP Modernization Act does have some positive changes to it. The distributions flexibility for impending retirees and retirees provides a plethora of chances to move away from the TSP into other retirement-appropriate accounts that don’t have so many restrictions tied to them.

However, Congress failed federal employees by not doing the following:

• Upgrading the TSP choices
• Getting rid of the Roth RMD
• Improving the TSP annuity

While the TSP has undoubtedly gotten some improvements, it’s not enough in some people’s eyes. However, something is better than nothing.

Will A Trade War Hurt The TSP?

The last few months have been a rollercoaster ride for the stock market, and the rollercoaster seems to be getting even faster with the prospect that a U.S. and China trade war could ensue. The question is, does it really matter and how big of a deal is it?

 

Nothing is conclusive at this moment.  And, only time will tell if a trade war possibility will, in fact, have an effect on the market and TSP funds. Still, there is some idea of what could happen.

 

U.S. Trade Deficit

 

The U.S., since the 1980s, has had an ever-increasing trade deficit with the world, as we import more goods than the country exports.  At the current rate, the U.S. deficit is sitting at $60 billion a month.

 

Based on 2017 information from the Census Bureau:

 

  • The U.S. exported approximately $1.5 trillion goods but took in $2.3 trillion, giving the nation an $800 billion deficit.
  • The U.S. imported $505 billion of Chinese goods but exported $130 billion to the country, meaning there is a $375 billion deficit with China.

 

Nearly half of the country’s total trade deficit is with China alone, and the number is only increasing. The start of a deficit between both countries occurred in 2002 when it hit $100 billion. In 2005, that number hit $200 billion, and the number continues to grow. It could hit $400 billion before too much longer.

 

Why is that?

 

It’s because many U.S. companies have outsourced manufacturing jobs to China. As China grows in its development and becomes more expensive, companies are looking to other Asia regions to outsource jobs and manufacturing.

 

Simply put, the country’s gross domestic product is just below $20 trillion, which means the deficit of $800 billion is about four percent of the country. A China trade deficit equates to two percent of the U.S. economy.

 

Understanding The New Tariffs and What It Means Competition-Wise

 

It’s only natural the U.S. government wants to get control of the deficit, especially with China. For U.S. workers, it also makes sense. After all, outsourcing means companies can find less expensive labor overseas, which drives down wages and boosts the unemployment rate in the U.S.

 

However, many companies are looking to embrace both outsourcing and globalization where financially it makes sense to do it. After all, they save money, provide goods to American consumers at a lower price and stay competitive in the worldwide market.

There are a plethora of competing interests going on here.

 

The Trump administration announced in 2018 that it would implement tariffs on certain types of exports. To date, here’s what has been suggested.

 

  • January 2018 – 30 percent tariff on imported solar panels – to last four years and decrease five percent each year. Tariffs were added to imported washing machines.
  • March 2018 – 25 percent tariff on steel; 10 percent tariff on aluminum. A number of economic regions were excluded from the tariffs, but China remains included in them.
  • March 2018 – New tariffs were included on $50 billion worth of imports from China. This caused the Dow to drop 724 points – the fifth-biggest daily drop in American history.

 

In response to all this, China announced it would put a 15 to 25 percent tariff on more than 100 American import goods, and then announced a few days later, an additional 100 or more items would be tariffed.  This is when President Trump announced another $100 billion of Chinese imports would be subjected to tariffs, but this has yet to be implemented. This created rumblings of a U.S. and China trade war, but there is no direct announcement as of yet.

 

A big concern investors have is how much China owns in U.S. Treasuries, which is $1.2 trillion – more than five percent of the nation’s federal debt. Should China quit buying or selling them in retaliation for these tariffs, it could lead to higher interest rates for the U.S. debt and cause upheaval in the global bond market, so a U.S. and China trade war may not be in China’s best interest.

 

Is there a balanced solution to it all?

 

As it currently stands, the S&P 500 is roughly 10 percent off from the highs, and the future price-to-earnings ratio is thought to be 16.4x. The latest market drops and volatility have given some high U.S. stock valuations some breathing room, but the U.S. is still considered expensive by the majority of the metrics.

 

There is still a lot of room for stock prices to drop should the U.S. and China trade war become reality. However, you can decrease your portfolio’s volatility by holding onto a lifecycle fund or TSP funds. Just ready yourself for the news – good or bad.

 

 

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