Chris Prybal in our QA department came across this great chart last week.
So coming into this year, pension funds were extremely underweight stocks, overweight bonds, and if you think ‘other’ is gold (I do) then very exposed to gold. Fast forward 10 months and we have some really nice stock gains, one of the worst years for bonds in years, and gold is looking at its first drop in 13 years. Whoops.
If you’ve followed me in the media, what I’ve been writing, or on Twitter – then you know I’ve been bullish this year. In my 2013, forecast I said this.
Turning to pension funds, they’ve historically been horrific market timers. From getting out of stock in the early ‘80s, to being very net long in the late ‘90s, their tracks record isn’t the best. Recent data shows private pension funds have just 50% of their assets in stocks, from 70% just a few years ago. This is in line with the ’95 levels, not a bad time to get long, as the SPX gained more than 200% in five years . Also, this is the first time in 40 years public pension funds are actually lowering stock allocations in the midst of a bull market.
All of the above adds up to massive amounts of cash on the sidelines. It is cliché to say, but at the same time very real. As the realization comes once again that the end of the world isn’t going to come, there is plenty of dynamite to spark a huge explosion higher in equities.
The above played out very well so far. The big question now is we don’t know the updated allocations, so it is tough to say what pension funds have done this year. Michael Santoli of Yahoo Finance and I had a discussion on this and he noted that stocks and bonds this year have already done most of the rotating for investors and probably pension funds.
That is a great point. It is tough to imagine stock allocation being anything but well above 50% after the action in stocks and bonds this year. That by itself isn’t bearish, but if pension funds start to get into stocks too much again, that could be a worry given their poor market timing history.
Let me know your thoughts on pension funds and the whole rotation discussion below.