Entering April, the market's expectation that the Fed will aggressively raise interest rates has continued to rise, and US stocks have also fallen sharply. What is even more surprising is that the data shows that as of April 27, the US Nasdaq Composite Index led the decline among the world's major stock indexes.
It's been a tough year for investors, and the wealthy are no exception. Both U.S. stocks and bonds have fallen this year, making portfolio conversations between Wall Street advisers and clients more challenging. The most conservative portfolios performed as badly or worse than the riskiest portfolios, with bonds offering little or no protection.
So is the moment to make most wealthy, seasoned investors think that the recent stock market volatility has been “total zero” and that it is time to buy the dip? Right now it doesn't appear to be the case.
First, U.S. stocks fell, but most wealthy investors think it’s not a good time to hunt for dips
A quarterly survey by Morgan Stanley's E-Trade conducted in the first two weeks of April found that only 49% of investors with $1 million or more in their stockbroking accounts believed U.S. stocks would trade at a higher rate. The second quarter ended with an uptick. The bullish sentiment reading among these wealthy investors slipped to 52% from 64% in the previous quarter.
Mike Loewengart, managing director of investment strategy at E-Trade Capital Management, said, “We've just had a really turbulent quarter, and as expected, the bullish sentiment has subsided due to market changes.”
Twenty-eight percent of investors surveyed expect U.S. stocks to edge up in the quarter, and 18% think U.S. stocks will end the quarter barely flat. However, a closer look at the findings shows that many investors remain reluctant to bet that the stock market has bottomed, a view that has been reinforced this week by the decline in U.S. stocks.
“Investors have embraced the new reality we face together as investors,” Loewengart said. He said that due to the current changes in stocks and bonds, there are opportunities to deploy capital, and the survey found that some investors are seeking new opportunities, but they are mainly taking a defensive stance and using inflation as the dominant force in investment decisions.
“The current environment is challenging for all investors. Millionaires are more sophisticated, they recognize volatility is part of the equity process and we have to live with it. At the same time millionaires can see through near-term pressures and wait to pick the right one. investment point.”
In fact, volatility is already expected by most people, and as a result, the percentage of millionaires who see volatility as the biggest risk to their portfolios has fallen—to 36% from 48% in the previous quarter.
Second, The biggest portfolio risk cited by wealthy investors is inflation (not market volatility)
An analysis of how wealthier and more seasoned investors are feeling now can start with the Fed. The Fed raised interest rates to fight inflation, but it risked pushing the economy further into recession.
More seasoned investors generally understand that the economy and markets are not the same thing, and that the Fed's hawkish turn (entering a rate hike cycle) is a direct byproduct of the strength of the economy. The Fed raised rates because it felt the economy was overheating from a price perspective and was confident that the economy was healthy enough to handle it.
But the views of the wealthy are divided: Among these wealthy investors, 38% expect a recession; 68% think the economy is healthy enough for the Fed to raise interest rates.
Another point worth mentioning is that the millionaires predict that the Fed will only raise rates two or three times. This could mean: either these investors are thinking about a 50 basis point or 75 basis point rate hike, and if the Fed gets more aggressive early in the cycle, two or three (rate hikes) could mean A full cycle; or they could be expecting the Fed to push the economy into recession after only a few rate hikes.
“All investors right now—whether wealthy or ordinary, individual or institutional—are facing an important question: Will the Fed have to take such a drastic step that it will tame inflation. The only way is to throw the economy into recession?” Loewengart said.
“We don't know the answer. We've heard relative optimism from the Fed, but history doesn't support the possibility of a soft landing. But it's also a special time. To some extent we're in uncharted territory right now.”
Inflation (not market volatility) was the top portfolio risk cited by these investors, with 38% citing the risk of a recession this time around, up from 26% in the previous quarter, the survey showed.
Third, the wealthy investors who hold cash have increased under inflation
As stocks fell, some of the bubbles at the top of the market have dissipated, leading to a decrease in the share of millionaires who believe the market is at or near a bubble — from 71% in the last quarter to 57% in April, but that hasn’t helped them improve risk appetite.
Loewengart said the proportion of wealthy investors who said they would not make any changes to their portfolios fell — from 44 percent to 36 percent, a “significant drop.” “In the current market, investors shouldn’t be under pressure to make hasty decisions, but choosing where to invest and making rational decisions doesn’t mean doing nothing,” Loewengart said.
At the same time, more investors said they were adding cash. Among wealthy investors surveyed, the percentage of millionaires who said they had increased their cash due to rising interest rates rose from 24% to 31%, while there was also an increase among millionaire investors who said they invested in inflation-protected bonds — up from 25% to 32%.
Holding cash during inflationary times is a difficult problem. Because it doesn't help in an inflationary environment, though the increase in the number of investors holding cash may reflect concerns about continued market volatility. Rising volatility means more downside risk to equities, and cash may be the first choice to ride out the storm. Institutional investors did say it's always important to have cash on hand so that they can be ready to pounce when stock market valuations are low.
“We are in a special period and we know that inflation will cause cash to lose its purchasing power, but with the front end of the yield curve and ultrashort debt not immune to volatility, cash is getting more attention.”
“They still have confidence in the economy, they just don't have confidence in the market in the short term, and they're preparing for future rotations, and even further corrections in the future,” Loewengart said.
Fourth, where are the areas that wealthy investors are willing to invest in?
Inflation now dominates all analysis of stock valuations by wealthy investors, the results of the survey's inquiry into S&P 500 industry sector bets show. Energy, real estate and utilities were the most popular sectors this quarter, while some traditionally defensive sectors less closely tied to inflation, such as healthcare and financials, did not perform as well as one might expect.
“Inflation concerns are overriding everything, including taking a typical defensive position within the stock market,” Loewengart said, which is why interest in energy, real estate and utilities is high, but not in financials. “It's not surprising that there is strong investor interest in sectors that are expected to benefit from a prolonged period of high inflation,” he said.
On the tech front, the percentage of investors showing a strong interest in tech stocks fell from the previous quarter after the tech sector’s rout this year – from 37% to 34% who made tech their preferred investment for the quarter .
Among non-traditional investments, commodities are getting a lot of attention from these investors – the percentage of millionaires who said they would increase their commodity investments increased from 11% to 22%.
However, Loewengart said, “When we see the bright spot is commodities and energy stocks, it is difficult to point out to conservative investors, because we think that they as risk averse investors should not necessarily own commodities.” He said, “Having a heavy position in the commodities space could cause problems in the future.”
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