Pension executives believe the record-breaking rally in stocks this year could be shortlived, given the market's tendency to return to its average annual return of about 10%.
Meanwhile, tactical asset allocation money managers, whose models generally attempt to anticipate major market moves, have a mixed view on what stocks will do next.
The Standard & Poor's 500 Stock Index already was up more than 9.5% for the year through March 29, reaching a new high of 503.12. That return comes after a meager 1.32% return in 1994, and an annualized return of 8.7% for the five years ended Dec. 31.
Given that, the booming stock market isn't generating much excitement among pension fund executives. They say long-term returns are what counts, and, based on historical patterns, high double-digit returns aren't likely to last for very long.
"We see this market as not as attractive as before it made this run," said Gerard Mead, pension fund manager for the $3.5 billion defined benefit plan of Bethlehem Steel Corp., Bethlehem, Pa. "Since we have money to invest, we wish it had been going south instead of north," he said.
John Young, chief investment officer for the $36.5 billion Teacher Retirement System of Texas, Austin, said while the stock market runup is encouraging, he doesn't expect the market to provide the same high returns in the 1990s as experienced last decade.
"History tells us you just can't repeat those types of returns," he said. Stock market returns will probably be closer to historical equity returns in the 9% to 10% level, he said.
Russell Flynn, director-pension fund investments for the $11 billion pension plan for Chrysler Corp., Highland Park, Mich., agreed.
Chrysler will stick with its asset allocation of 60% stocks, 35% bonds and 5% cash and alternative investments, even if the market jumps higher than was forecast, he said.
Joseph H. Shepard Jr., manager of corporate benefit funds for American Electric Power Service Corp., Columbus, Ohio, said a short-term hike in the stock market won't affect his company's pension management. "You have to wait and see what happens" over the course of the year, he said. American Electric has about $1.5 billion in defined benefit assets.
Looking ahead, plan sponsors and TAA managers have mixed views on the market, with bond performance, monetary policy, and global uncertainty all playing a role.
Mr. Young of the Texas Teachers' fund said the current bull market is good news for equity investors, but its continued expansion relies on interest rates and the bond market.
"Stocks and bonds are still tied together. When bonds rally, stocks move up too. If the bond market falters, though, and the Fed tightens again in the next few months, and if interest rates rise, look for the stock market to correct. We would not be surprised to see a meaningful correction in stocks," said Mr. Young. Texas Teachers' manages nearly $20 billion in equities internally.
At current market levels, Mr. Young said "everyone is nervous" and is looking for a downturn.
"But, again, who knows? If the economy slows just enough to have a 'soft landing,' it may be possible for the market to go up some more. As interest rates decline the stock market becomes less overvalued."
Is the current market rally sustainable? Mr. Young said yes, if there is no significant runup in interest rates.
"That doesn't mean we won't have an intra-year market correction. I expect the market to be up, but during the year we could see some serious dips in the road. A lot of it depends on what happens to interest rates," he said.
Edgar Peters, chief investment strategist and director of asset allocation for PanAgora Asset Management, Boston, said: "We are very bearish on equities." He said economic growth is peaking, and he doesn't expect an accelerated growth in stocks.
He points to the restrictive monetary policy. "The spread (between stock returns and bond yields) is narrower then you think." he said.
Monetary policy and business cycle indicators of its model signal caution, Mr. Peters said. He said PanAgora's 60% equity/40% bonds benchmarked portfolios - which had 48% equities at the beginning of March - are now at 35% stock. Its three-way portfolios (stocks, bonds, cash) are as low as 16%.
Most of the money was moved into bonds, with 5% to 6% going into cash in three-way portfolios, as the yield curve flattens.
"Most of the market," Mr. Peters explained, is tied to the "soft-landing approach." He doesn't believe the Fed can slow the economy down without risk.
The risk is if something unexpected happens. In the past it has been related to energy crises, he said, but cautioned any international crisis could have the economy teetering on the edge.
PanAgora manages about $5 billion in domestic TAA assets and another $2.5 billion in global TAA strategies. The global model is underweighted in domestic equities.
The TAA model at Mellon Equity Associates, Pittsburgh, had a 40% allocation to stocks since the second week in November, but just two weeks ago moved to 60%, its benchmark weighting, said Bill Rydell, president and chief executive officer.
The model, he said, signaled that equities were modestly undervalued when compared to bonds, where they had been modestly overvalued before November when the allocation to stocks were at its maximum of 80%. Mellon Equity has $2.5 billion in TAA assets under management, he said.
R.M. Leary Inc., Denver, got a strong signal Dec. 23 from its quantitative model to move into equities, said Carolyn Mertens, senior vice president. It continues to hold that position. She does not anticipate any quick changes.
The firm, which has $40 million in TAA for institutional clients, uses a group of mutual funds, which are largely aggressive growth, small-cap and technology stocks. Ms. Mertens described the model as trend following and quantitative.
This story was written by Paul G. Barr, Fred Williams and Sabine Schramm.