January 2022: U.S. Monthly Pension Monitor

Despite a turbulent equity market, average funded status remained unchanged due to higher discount rates

January Market Summary

  • Despite a market selloff, funded status stayed flat in January: Higher discount rates offset falling equity markets resulting in muted funded status movement. Assets returned -4.8%, while liabilities fell by 4.7%.1
  • U.S. equity markets posted their worst month since March 2020: After soaring almost 27% in 2021, the S&P 500 experienced a sharp selloff in January due to inflation concerns and fed tightening, ending the month down 5.3%.  
  • The yield on the Bloomberg Barclays Long Credit Index increased 41 basis points (bps): Long credit spreads widened 16 bps while the underlying Treasury basis increased 25 bps.
Market Watch Dec 2019 Dec 2020 Dec 2021 Jan 2022
Funded status 89.8% 90.3% 99.6% 99.5%
CITI discount rate2 3.01% 2.23% 2.63% 2.99%
Long Credit yield2 3.63% 2.78% 3.10% 3.51%
U.S. 30Y TSY yield 2.39% 1.64% 1.90% 2.11%
S&P 500 3,231 3,756 4,766 4,516

Spotlight: A rough start

  • Concerns about the Fed turning more hawkish going into a slowing economy has cast a dark cloud over the markets
    • The 2s-30s curve flattened significantly, with the spread compressing from 117 bps to 93 bps
    • Rising short term interest rates have a high impact on Treasury funding costs. $14BN of the $18BN gross issuance in 2021 were of maturities less than one year 
  • Stock markets turned decidedly negative, with the S&P 500 having its worst January ever at -5.3%, only surpassed by losses in January of 2009 during the depth of the financial crisis
    • Despite strong reported earnings from Microsoft & Apple, overall market sentiment was extremely negative, with 349 of 500 stocks falling during the month
    • The NASDAQ had also seen its worst January in history, with many of the former leaders falling hard from peak valuation
    • Former market darlings such as Peloton, Palantir, Nvidia, and Tesla have all fallen by 84%, 65%, 27%, and 24% respectively from peak, with Netflix dropping 22% in a single day post earnings
    • Assets furthest out the risk curve, such as Bitcoin is now down 43% from its peak in November
  • Despite the sell-off in equities, the mood has remained relatively sanguine in Investment Grade (IG) credit markets for now, with spreads only widening by 14 bps over the month
    • The equity downdraft would imply IG credit should be approximately 10 bps wider than current spread levels
    • Down the credit stack, high yield corporates experienced a more punitive risk off environment, with spreads widening 59 bps in January
    • Although risk assets had a choppy month, funded status for most corporate DB plans remained stable due to higher rates and wider spreads which raised discount rates and lowered liability present values
  • IG corporate issuance activity remains robust with $95BN of new issues pricing this month compared to $90BN in January 2021
  • SLC Management has been positioned to take advantage of this fallout by holding a ~5% sleeve of Treasuries in our Long Credit portfolios that can be deployed as dry powder in the event of further spread widening

Milliman Pension Funding Index (January Estimate) 

1 Funded Status for the current month is estimated and subject to change as final numbers are released. Data from reference Bloomberg Indices.

2 The Long Credit yield corresponds to the Bloomberg Long Credit Index. The Citi Discount Rate corresponds to the FTSE short pension liability index.