Traders work on the floor of the New York Stock Exchange in masks right before the market hit its Covid-19 bottom in late March 2020.
Lucas Jackson | Reuters
The Dow Jones Industrial Average drop of 650 points on Monday was just the first move in what turned out to be a rapid correction. If the market action has you concerned about a sudden shift in investor sentiment and prolonged spike in volatility, maybe you can take comfort in the fact that among America’s wealthier investors not much has changed this quarter in terms of their outlook on stocks and the U.S. economy.
The majority of millionaire stock market investors expect the fourth quarter to finish with a gain for the S&P 500. Those who described their view of the market as “bullish” ticked up from 54% to 55% quarter over quarter, and was slightly higher than the view of the general investing public.
More encouraging: there was a significant increase among wealthy investors who think stocks will post a gain in Q4, up from 43% last quarter to 55%. That finding puts even more distance between the wealthy set and the general investing public, among which under half (48%) expect a gain. It is worth noting, though, that the largest segment of bullish millionaires, more than one-third, has a moderate outlook: the biggest bump in those expecting the S&P 500 to rise this quarter (up from 26% to 36% of those surveyed) do not expect the gains to exceed 5%.
“The wealthy are responding to a strong market, and millionaires saw, maybe more so than other groups, the benefits of rising stocks,” said Mike Loewengart, chief investment officer at Morgan Stanley’s E-Trade Financial capital management unit, responding to the firm’s fourth quarter survey of investors with more than $1 million in a brokerage account they actively manage.
The survey was conducted between Oct. 1 and Oct. 13 among 842 investors who conduct their own trading, with the views of 157 with more than $1 million in the market provided exclusively to CNBC. It also includes results from the broader investing universe, those with at least $10,000 in a brokerage account.
Loewengart said that even with concerns about the presidential election running high — 50% said the election was the biggest risk to their portfolio, which was greater than the coronavirus pandemic (33%), recession (29%), gridlock in Washington (21%) and market volatility (19%) — it is not pushing most of these investors to the sidelines.
In fact, those who described the economy as being in a recession declined from 50% to 36% quarter over quarter.
“There near-term experience of a rising market they expect to continue,” Loewengart said.
Some recent data has provided an improving economic backdrop to support this stock market view, he added, including retail sales that show a consumer stronger than anticipated. “It’s not secret real estate has done well and that can spur more consumer spending,” he said. Home prices in August saw the biggest gain in two years.
The election concerns, meanwhile, are countered by knowledge among many wealthy investors that markets have a history of finishing up in an election year.
“The group recognizes that longer-term, the election really will not have that large of an impact on investments, and we see that from history,” Loewengart said.
Among these wealthy investors, 62% said they plan to make no changes to their portfolios ahead of the election. And more are likely to move out of cash and into new positions (13%) than increase cash holdings (5%).
The Federal Reserve‘s dovish policy and belief that more stimulus is on the way likely contributed to this outlook. While stimulus talks have broken down, at the highest levels of the market it is still the expectation, if total amounts and timing are uncertain.
“The market is expecting there will be a stimulus bill,” Carlyle Group co-founder David Rubenstein told CNBC on Monday. “The question is whether it is $1 trillion or $2 trillion….. The market isn’t clear yet. But I have no doubt there will be another stimulus bill. The market needs it. I think the economy really needs it.”
Thirty-seven percent of millionaires surveyed by E-Trade Financial graded the U.S. economy at a D or F, but the Fed’s moves offset that outlook. “The Fed will remain highly accommodative,” he said. And with rates near zero due to the Fed’s actions, the appetite to be defensive in fixed-income is less appealing to wealthy investors. “It’s not low-risk like traditionally, it’s the risk of keeping up,” he said.
The survey found that the risk level of millionaire investors has, for the most part, remained the same (62%), but the percentage of the wealthy who said their risk appetite had declined did go down in Q4, from 30% to 22%.
“I’m not surprised to see millionaires slightly more bullish given the policy backdrop,” Loewengart said. “When I think about whoever wins an election, it will not alter the fundamentals of asset classes available to investors and it is not going to change the long-term attractiveness of asset classes. … Future returns in fixed income will be muted and investors need to move to other asset classes,” he said. “There is no yield in fixed income and if you want to receive a meaningful return above inflation it has implications for how you answer the risk tolerance question.”
Mike Prendergast, director at New York City-based wealth management firm Altfest, said the view among his clients is less bullish than that, with most still believing the U.S. economy is in a recession, and noting that half the jobs lost since February still have not come back. While wealthy investors are happy the stock market has continued to do well, they are cautious because they think volatility will continue for a while.
“Every time there is a good piece of news on a clinical trial the market is up, but when Covid outbreaks spike in more states, things go down,” Prendergast said.
The Monday market drop did occur after a weekend that saw the highest single day total for cases in the U.S. to date.
He said while most clients of his firm do tend to be a little more conservative than the average, he called them “sleep tight” investors, even those 65 years of age and older do need to maintain a significant exposure to equities given the inflation outlook and longevity.
U.S. equity valuations are high, but “we’re not saying bubble territory,” Prendergast said, though Altfest does caution its clients about the potential for a correction, a reminder that is important at a time when the stock market and client portfolios are doing well.
“We are cautiously optimistic about the mid- to long-term outlook, but with valuations back up to pre- pandemic levels, we do think it’s too high,” he said, based on historical analysis of the market. “But we’re not telling people to change allocations if they can stomach it,” Prendergast added. “Plowing through temporary volatility is fine.”
Bruce Weininger, principal at Chicago-based wealth management firm Kovitz, said his firm has been busy trying to convince clients to not act on election fears.
“As a group, I have never seen our clients as nervous as they are right now, concerned about the market. We’re spending most of our time trying to convince people to not act on election concerns, and we’ve been largely successful.”
Weininger said for investors that made the right decisions back in March, taking money already on the sidelines and investing at stock lows, it does make sense to do some selling, but not because of election concerns or the politics of any candidate. Trimming back equity levels that are now above target allocations, given the gains since the March bottom, is always a proper move. It also provides investors with a new source of dry powder for the next drop in the markets and the next opportunity to aggressively rebalance.
Excess return in equities is not a reward for taking extra risk, he said, but for accepting volatility, though it is not easy to convince clients to sell for the right reasons, and maintain high equity allocations, with the disonnects they are seeing in the world between the stock market and broader economic situation of many in the country.
“We all look around and see the pandemic, and people out of work, and airlines going broke, a third of the restaurants you’ve gone too may never reopen. I can’t tell them ‘I know the answer,'” Weininger said, but he added that biggest argument on the side of stocks not being overvalued is the Fed stance of keeping rates lower for longer and making stocks more attractive.
“People tend to get more conservative as they get older and we often push back against that, not that some decrease in risk isn’t warranted, but a 60 year-old retiree has a 20-year time horizon. Do you think stocks will do better than 1-2% in bonds?” he said.
One millionaire data point that is as consistent over the past two quarters as the bullishness tracked by E-Trade comes from Tiger 21, the network of wealthy investors across the U.S. founded by Michael Sonnenfeldt. But what has remained consistent, and at a record level, in surveying of his group from Q3 to Q4 is high cash levels.
Tiger 21 recorded a “massive shift” into cash, of 19%, in Q3, and that has held steady. Wealthy investors in the group have not added to that, but it is a record level which Tiger 21 has never before seen in its 12-year history. Previous to the past six months, cash was never above 13%, and it “remains extraordinary,” Sonnenfeldt said, describing this new cash level as “the balance between comfort and ambition” for his affluent peers. He noted that his network created the majority of its wealth through business formation rather than market trading, which leads to what is a distinct view on stocks within a short-term time frame, and overall, members of the group, given their entrepreneurial backgrounds, typically hold only a minority of their wealth in public equities in any environment.
But he is hearing many of conversations about the election.
“People have a sense of who is the likely winner but equally say a number of things can happen between now and the election and the margin for error feels greater than ever been before,” he said.
He also said the disconnect between Wall Street and Main Street continues to worry his affluent peers.
One national data point that has stuck with Sonnenfeldt is that the universe of public companies employed about 20% of Americans, whiled 80% are employed by smaller businesses, “everything from laundromats to beauty parlors. And one thing our group has focused on is we have two quite different economies, and it took until now to appreciate that both can be true. Eighty percent of people are not employed by public companies and are in really challenging times, and that’s why the PPP is so critical, and yet even without more stimulus the markets have held up. … We’ve never before quite witnessed what appears to be two very different worlds and we’ve been trying to understand the implications because it is quite profound.”
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