Wealthy investors aren’t convinced that big stock market losses mean it’s a time to buy

It’s been a tough year for 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 difficult. The most conservative portfolios performed as badly if not worse than the riskiest portfolios, with bonds offering little protection. But if there is a time when the majority of wealthy and experienced investors are calling for the clear on recent stock volatility and buying the stock drop, it doesn’t look like it.

According to the results of a quarterly E-Trade survey of millionaire investors in April and shared exclusively with CNBC. Optimism among this demographic fell from 64% to 52% quarter over quarter.

“We are coming off a very volatile quarter and as expected the uptrend has diminished in response to what was happening in the market,” said Mike Loewengart, managing director of investment strategy for E-Trade Capital Management. of Morgan Stanley.

The data points on the S&P 500 and overall sentiment are split almost down the middle, so they can be read as a glass half dropped or half empty. Twenty-eight percent of investors polled by E-Trade expect stocks to rise modestly this quarter, and 18% believe the market will end the quarter no worse than flat. But a closer look at the survey results shows that many investors remain reluctant to bet stocks have bottomed, a view that this week’s selloff has reinforced.

“Investors have taken on board the new reality that we collectively face as investors,” Loewengart said.

Because of what’s happening in stocks and bonds, there will be opportunities to deploy capital, he says, and the survey reveals there are pockets of investors looking for new opportunities, but mainly with a posture that remains defensive and focused on inflation as the dominant force in investing. the decisions.

“The current environment is tough for all investors. Millionaires are a bit more seasoned and they 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. term and are waiting to choose their places,” 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 in the first two weeks of April among 130 individual investors with at least $1 million in brokerage accounts, ahead of recent days of deep dips in stocks, including strong sell-offs. of Tuesday. But it was led in what had been a brutal quarter for investors.

As the stock market tried to rally on Wednesday, first-quarter declines and recent heavy selling days have the Dow Jones Industrial Average and S&P 500 index more than 10% off their 52-week highs and the Nasdaq Composite by more than 20%.

A good place to start analyzing how wealthier, more experienced investors currently feel with the Fed raising interest rates to fight inflation, but at the risk of pushing the economy closer to recession. Consequently.

More experienced investors generally understand that the economy and the market are not the same thing, and the Fed’s hawkish run through a rate hike cycle is a direct byproduct of the strength of the economy, the Fed raising rates because the economy is overheating. from a price point of view, and convinced that the economy is healthy enough to deal with it.

But there’s a disconnect between the 38% of those 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 just how difficult it is to assess the Fed right now is that millionaires only expect two to three Fed rate hikes. This could mean one of two things: either these investors are thinking in terms of 50 or 75 basis point hikes, and two to three could represent a full cycle if the Fed becomes more aggressive earlier in the hike cycle. rates, or they could expect the Fed to push the economy into a recession after just a few rate hikes.

“This is the key question right now for all investors, large or small, individual or institutional: will the Fed have to resort to such extensive measures that the only way to get inflation under control is to put the economy in recession? said Loewengart. “We don’t know the answer. We’re hearing relatively rosy sentiment from the Fed, but history doesn’t support the likelihood of a soft landing. But it’s also a unique moment. We’re in territory. somewhat unexplored at the moment,” he added.

While inflation, not market volatility, is the top portfolio risk cited by these investors, the 38% who cited recession risk represents a notable jump from 26% last quarter.

As stocks have sold off, some foam has come off the top of the market, leading to a decrease in the number of millionaires who think the market is in or near a bubble, from 71% last quarter to 57% in April. But this does not cause them to increase their appetite for risk.

There was a drop in the number of investors saying they won’t make any changes to their portfolios, from 44% to 36%, and that’s a “significant drop”, according to Loewengart, for a group of investors seasoned people who understand that markets don’t always go up. “Investors shouldn’t make rash decisions under duress in today’s market, but picking their places and making rational decisions doesn’t mean doing nothing,” he said.

At the same time, more investors indicated that they were adding liquidity, not in large numbers, but a noticeable increase given the decline in share prices that had already been suffered, rather than to the most battered sectors. like technology. The percentage of millionaires who said they added money as a result of the rate hike rose from 24% to 31%, while there was also a 7% increase in millionaires who said invest in Treasury securities protected against inflation, from 25% to 32%.

Cash is an enigma in times of inflation. That’s not going to help in an inflationary environment, but concerns over continued market volatility are driving up cash positions among investors. More volatility means more downside risk for stocks and cash may be the perfect place to get out.

Institutional investors say it’s still essential to have cash on hand to be ready to pounce amid falling stock valuations.

“We live in unique times and we know that cash will lose its purchasing power due to inflation, but because the start of the yield curve and ultra-short bonds have not been immune volatility, cash gets more attention,” Loewengart said.

“They still have confidence in the economy, but not in the short-term market and they are preparing for future rotations, even more corrections down the road,” he said.

Survey questions on sector bets within the S&P 500 show that inflation currently dominates any stock valuation analysis. Energy, real estate and utilities were the most popular sectors for this quarter, and some traditional defensives less linked to inflation, such as health care and financials, did not hold up as well as we might have thought so.

“Inflation concerns trump everything else, including typical approaches to defensive positioning within equities,” Loewengart said. “That’s why there’s a high level of interest in energy, real estate and utilities, but not financials. But he added, “It’s not surprising to see all the interest in sectors that should benefit from a prolonged rise.”

Even after the heavy losses in technology stocks 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 best bet for the quarter rose from 37% to 34%. On Wednesday, a day after the Nasdaq Composite posted a new low for the year, the tech-focused index began trading more than 1% higher as tech stocks rallied on strong results from Microsoft, but trading has been volatile. Microsoft was down about 18% this year before going public on Wednesday.

Among non-traditional investments, commodities are attracting a high level of interest among these investors, “a big jump and a significant increase,” Loewengart said. The percentage of millionaires reporting increasing their investments in commodities doubled from 11% to 22%.

This worries him as part of a portfolio planning process that could see his long-term focus lost to short-term inflation concerns. “When we see that the bright spots are commodities and energy stocks, it’s hard to point that out to conservative investors, because we don’t think they should necessarily hold commodities as risk-averse investors. Having a significant position in commodities could cause problems down the road,” he says.

“Hopefully some of the inflationary fear is a little exaggerated, and clients with a balanced portfolio can return to their traditional posture, and parts of the portfolio moving in opposite directions,” Loewengart added.

But for risk-averse investors currently facing losses in their stock and bond portfolios, the survey sends the message to investors that there are few places to hide.