Why The Equity Bull Market Must Continue (Or Else)

Via Global Macro Monitor blog,

We have been busy crunching some very interesting data on pension funds from the most recent Federal Reserve’s,  Flow of Funds Accounts.    Check out the charts below.

Interestingly,  the last time Private and State & Local Government Pensions were fully funded was at the end of the stock market bubble in 2000.  Pensions were 25 percent overfunded in 1999.

However,  even with stocks making new highs,  these pensions remain $2.33 trillion, or 27 percent of their assets,  underfunded at the end of 2016.   Surprising.

One would think the slope should be headed south as stocks rise, no?  Just as it was from 1995 to 2000.   On the contrary,   unfunded entitlements are heading parabolic north.

Could be a combination of an under-allocation to equities since the dot.com and financial crash (see charts) and rising pension entitlements,  mainly in state and local government retirement funds.   Probably more the result of the later.

The Upshot?   It seems the only way out of the pension mess — other than massive contributions, tax increases, or defaults — is a humungous equity bull market with pensions appropriately positioned.   In aggregate, they seem to be gun shy after the financial crisis with their average aggregate equity allocation only about 50 percent of what it was at the start and first few years of the new millennium.

One caveat is the allocation data can be distorted and deceiving as equities are measured at their market value where some of the other assets are not.

The question is:  Will Janet Yellen and President Trump do “whatever it takes to preserve” the pensions?   And will it be enough?