It’s been a tough year to be an investor, and the wealthy are no exception. Losses in the stock and bond markets this year have made portfolio conversations between Wall Street investment advisers and clients more challenging. More conservative portfolios have fared as poorly, if not worse, than riskier portfolios, and bonds offer little protection. But if there comes a time when most of the wealthy and experienced investors give a thumbs up to recent stock volatility and buy the shares, this doesn’t seem to be the case.
Fewer than half (49%) of investors with $1 million or more in a self-directed brokerage account think the S&P 500 will end the second quarter with a profit, according to the results of an E-Trade quarterly survey of millionaire investors conducted in April and shared exclusively with CNBC. Optimism among this demographic fell from 64% to 52% quarter over quarter.
“We’re coming off a really volatile quarter and, as expected, optimism dropped in response to what was happening in the market,” said Mike Loewengart, managing director of investment strategy at Morgan Stanley’s E-Trade Capital Management.
The S&P 500 data points and overall sentiment are split almost down the middle, so it can be read as a glass half-dropped or glass-half-empty. Twenty-eight percent of investors surveyed by E-Trade expect a modest gain in stocks this quarter, and 18% believe the market will end the quarter flat. But a closer look at the survey results shows that many investors remain reluctant to make a bet that stocks are bottoming out, a view that has been reinforced by this week’s selling.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, April 6, 2022.
Brendan McDermid | Reuters
“Investors have come to grips with the new reality that we collectively face as investors,” Loewenart said.
Because of what’s happening with stocks and bonds, there will be opportunities to deploy capital, he says, and the survey finds pockets of investors looking for new opportunities, but mostly with a defensive stance and an inflation-oriented stance as the dominant force. in investment. decisions
“The current environment is challenging for all investors. Millionaires are a little more experienced and recognize that volatility is part of the process with stocks and we have to accept that. But millionaires can see through the short-term pressure and are waiting to pick their spots,” he said.
In fact, volatility is now so expected that the percentage of millionaires who said it was the biggest risk to their portfolio fell quarter over quarter from 48% to 36%.
The survey was conducted during the first two weeks of April among 130 individual investors with at least $1 million in brokerage accounts, before the most recent days of deep falls in stocks, including Tuesday’s sharp selloff. But it came after what had been a brutal quarter for investors.
While the the stock market was attempting a comeback on Wednesday, the declines of the first quarter and the last intense days of sales have the Dow Jones Industrial Average Y S&P 500 Index both at over 10% off their 52-week highs and the Nasdaq Composite discount by more than 20%.
A good place to start looking at how wealthier, more experienced investors feel right now is with the Federal Reserve, which is raising interest rates to fight inflation but risks pushing the economy closer to zero as a result. the recession
More experienced investors generally understand that the economy and the market are not the same thing, and the Fed’s aggressive shift into a rate-hike cycle is a direct byproduct of how strong the economy is, with the Fed raising rates because the economy is overheated. from a pricing perspective, and convinced that the economy is healthy enough to handle it.
But there is a disconnect between the 38% of these wealthy investors who expect a recession and the 68% who say the economy is healthy enough for the Fed to enact rate hikes. Another finding from these investors that shows how difficult it is to assess the Fed right now is that millionaires are forecasting only two or three rate hikes from the Fed. This could mean one of two things: either these investors are thinking in terms of 50 or 75 basis point hikes, and two or three could represent a full cycle if the Fed turns more aggressive earlier in the rate hike cycle. , or they could expect the Federal Reserve to push the economy into a recession after just a few rate hikes.
“That is the key question right now for all investors, big or small, or individuals or institutions: Will the Fed have to resort to such significant measures that the only way to control inflation is to put the economy in recession?” Loewengart said. “We don’t know the answer. We hear relatively bullish sentiment from the Fed, but history doesn’t support the likelihood of a soft landing. But it’s also a unique time. We’re in somewhat uncharted territory right now.” he added.
While inflation, not market volatility, is the top portfolio risk cited by these investors, the 38% who mentioned recession risk was a notable jump from 26% last quarter.
As stocks sold off, there was some froth at the top of the market, and that led to a decline among millionaires who think the market is in or near a bubble, from 71% in the last quarter to 57% in April. But this does not lead them to increase risk appetite.
There was a decline among investors who said they wouldn’t make changes to their portfolios, from 44% to 36%, and that’s a “significant decline,” according to Loewengart, for a group of seasoned investors who understand that markets don’t always go up. “Investors shouldn’t make hasty decisions under pressure in today’s market, but picking their spots and making rational decisions doesn’t mean doing nothing,” she said.
At the same time, more investors indicated that they were adding cash, not in large amounts, but with a notable increase given the drop in share prices that had already been experienced, rather than in the hardest-hit sectors such as technology. The percentage of millionaires who said they were adding cash as a result of the rate hike jumped from 24% to 31%, while there was also a 7% jump in millionaires who said they were investing in inflation-protected Treasury securities. , from 25% to 32%.
Cash is an enigma in a time of inflation. It’s not going to help in an inflationary environment, but concerns about current market volatility explain the spike in cash positions among investors. More volatility means more downside risk for stocks and cash is perhaps the place to go to beat it.
Institutional investors say it is always critical to have cash available to be ready to jump amid depressed stock valuations.
“We are in unique times and we know that cash will lose its purchasing power due to inflation, but because the front end of the yield curve and ultra-short bonds have not been immune to volatility, cash gets more attention,” Loewenart said.
“They are still confident in the economy, but not in the market in the short term and are preparing for future rotations, even further corrections in the future,” he said.
The survey questioning of sector bets within the S&P 500 shows that inflation is dominating any stock valuation analysis right now. Energy, real estate, and utilities are the hottest sectors for this quarter, and some traditional defensives that aren’t as closely tied to inflation, like health care and financials, haven’t done as well as they did. would be expected.
“Concerns about inflation are dominating everything else, including typical defensive positioning approaches within equities,” Loewengart said. “That’s why there is a high level of interest in energy, real estate and utilities, but not in finance.” But he added: “It is not surprising to see all the interest in sectors that will benefit from prolonged high inflation.”
Even after tech stocks’ heavy losses this year. the percentage of these investors who expressed a high level of interest in the technology was lower quarter over quarter. The percentage of investors citing technology as their top bet for the quarter fell from 37% to 34%. On Wednesday, a day after the Nasdaq Composite hit a new low for the year, the tech index started trading more than 1% higher as tech stocks rose led by the Microsoft index. strong earnings results, but early gains were tenuous in trading. Microsoft was down about 18% this year before it began trading on Wednesday.
Among non-traditional investments, commodities are receiving a high level of interest among these investors, “a big jump and a significant increase,” Loewengart said. The percentage of millionaires who said they were increasing their investment in commodities doubled from 11% to 22%.
This worries you as part of a portfolio planning process that you could lose your long-term lens in the face of short-term inflation concerns. “When we see that the bright spots are commodities and energy stocks, it’s hard to single out conservative investors because we don’t think they should necessarily hold commodities as risk-averse investors. Holding a significant position in commodities could cause problems for investors. the way down. the road,” he said.
“Hopefully, some of the inflation fear is a bit exaggerated, and clients with a balanced portfolio will be able to go back to their traditional stance, and parts of the portfolio will move in opposite directions,” Loewengart added.
But for risk-averse investors facing losses in both stock and bond portfolios right now, the survey sends the message to investors that there are few places to hide.