Pension Funds Becoming Pessimistic Could Be Bad for Stock Market
When big buyers start to become skeptical about owning stocks, it’s time to pause and reflect. It warns that a sell-off or an outright stock market crash could be ahead.
Before going into any current details, let’s go back to 2008–2009. At that time, the Federal Reserve and central banks around the world were lowering their interest rates to prevent a global financial collapse. As they lowered their rates—which affected pension funds, sovereign wealth funds, and more—people around the world found themselves wondering one thing: how to get better yields on their investments.
As a result, a lot of people rushed to buy stocks in search of higher yields. The stock market was the only place that looked attractive. Bonds, something that they had held primarily, weren’t doing much for them.
As a result of this new money going into the stock market, we saw massive gains. Since 2009, key stock indices like the S&P 500 have increased by over 300%.
Now, the big buyers’ sentiment seems to be turning, becoming pessimistic about stocks. This is not good, since they were the ones that gave the markets a boost. What do you think will happen once they step out?
Consider the largest pension fund in Australia, AustralianSuper Pty Ltd, which has $104.0 billion in assets. The fund is saying that it plans to cut its stock allocation from 62% to 55% over the next 12 months.
“We’re much closer to the end of the cycle, and that will dictate a much lower equities exposure,” said the fund’s Chief Investment Officer Mark Delaney. (Source: “Australian Pension Giant Will Cut Exposure to Stocks,” Bloomberg, July 4, 2018.)
And AustralianSuper isn’t the only big buyer getting worried about stocks. Many large banks and investment management firms are starting to grow concerned as well.
For instance, Fidelity International recently downgraded its classification of the stock market from “overweight” to “neutral.” Fidelity has $258.4 billion worth of assets under management, so this is significant. (Source: “Fidelity facts,” Fidelity International, last accessed July 10, 2018.)
Goldman Sachs Asset Management LP has also said that it’s becoming “cautious” about the stock market.
What’s Ahead for the Stock Market?
If you listen to the mainstream media, there’s a lot of complacency about stocks. However, the odds are stacking higher in favor of a stock market crash being ahead.
We had a lot of big buyers come into the stock market after the 2008/2009 financial crisis. Now they see other opportunities, if not outright pessimism. They haven’t sold off their stocks yet, but, when they do, don’t be shocked to see stock markets slide lower very quickly.
Here’s one more thing: pension fund and investment management firms aren’t the only buyers that could disappear from the stock market. Over the past few years, companies were heavily buying their own stocks, but they may step back a little.
All things considered, I can’t help but be skeptical about the returns on the stock market. I see the upside to be limited, and I really doubt that the markets could go up 300% in the next nine years like they did in the nine years prior.