By one closely watched measure of valuation, Alan Greenspan's irrational exuberance warning should be keeping investors near the sell button. But as the Dow Jones Industrial Average passes the 23,500 mark, there is no fear among investors with a million dollars or more in the market.
New survey results show they are as confident in the U.S. economy and stocks as they have been at any point this year, with 74 percent of million-dollar market accounts bullish on the fourth quarter, up from 61 percent who were bullish in the prior quarter. Even as some readings show a wide gap between the bulls and bears — the biggest gap between market optimists and pessimists since Black Monday — the bullish mood is most pronounced among older million-dollar investors, who have been around for more than a few ups and downs in Dows and portfolio values. Those 55 or older are the significantly more bullish than younger investors.
"Fundamentals matter again and are becoming front and center for the economy and equities," said Mike Loewengart, vice president of investment strategy at E-Trade Financial.
Investor bullishness by age
| Q4 expectations | Investors 25-34 | Investors 35-54 | Investors 55 and older |
|---|---|---|---|
| Bullish | 61%% | 62% | 72% |
| Bearish | 39%% | 38% | 28% |
| US economy grades an A or B | 56% | 59% | 68% |
| S&P will rise by at least 5 percent | 32% | 45% | 50% |
Source: E-Trade Financial survey, Oct. 1 - Oct. 10
The latest GDP reading of 3 percent was surprisingly strong after the multiple hurricanes that hit the United States, while consumer confidence has hit a 17-year high, according to the Conference Board.
A baseline bullishness has been in place throughout 2017. And the latest GDP number was released after the survey of million-dollar self-directed brokerage investors, conducted by E-Trade and provided exclusively to CNBC. But Loewengart said it is confirmation of the trend line with broader economic statistics and "the slow burn" of the U.S. economy. Corporate earnings have been solid at the same time, he said. Exchange-traded fund flows to equity portfolios were more than $43 billion in October, the highest level since the post-election euphoria of November 2016. In October, the top two stock ETFs for new flows from investors were S&P 500 funds, which is a change from recent months during which overseas stock ETFs had led over US stock portfolios in flows.
Mitch Goldberg, president of investment advisory firm ClientFirst Strategy, said the level of confidence could make some in the market reflexively become contrarian, but this bullishness doesn't have to mean it's time for stocks to have a sudden, spontaneous meltdown.
He said years of "breathtakingly massive" corporate stock buybacks since the end of the Great Recession are giving way to the high-end retail investor taking the reins. "And why wouldn't they? When you see synchronized global growth combined with big earnings upside surprises from cyclical type companies, you're in the sweet spot of corporate growth. Plus, we had to get through an earnings recession last year to get to this point."
The percentage of investors with million-dollar brokerage accounts who expect the market to end the fourth quarter rising was in the 50s through the first three quarters of the year, before jumping to 71 percent in the fourth quarter. Those who think the market will rise by 10 percent hit double-digits for the first time this year (17 percent of million-dollar account holders). The percentage of these investors who expect the market to end the quarter down has declined steadily, from 22 percent in Q1 to 9 percent in the latest survey.
According to Thomson Reuters, of the 306 companies in the S&P 500 that have reported earnings to date for the third quarter, 72.9 percent have been above analyst expectations. That's much higher than the long-term average but just slightly above the four-quarter average of 72 percent. A little more than 66 percent of S&P 500 companies have reported revenue above analyst expectations. That's above the prior four-quarter average of 56 percent.
"We haven't seen this happen over the past eight years," the E-Trade official said, referring to bullishness based on a combination of strong earnings and strong economic fundamentals. "When I think about what's driving the market, it has been policy-driven — 'The Fed will be accommodative and will continue its cycle.'"
Where $1 million+ market accounts think S&P will end quarter
| Market at quarter-end | $1 million+ Q4 | $1 million+ Q3 |
|---|---|---|
| Rise | 71% | 51% |
| Rise 20% | 1% | 2% |
| Rise 15% | 2% | 2% |
| Rise 10% | 17% | 7% |
| Rise 5% | 51% | 40% |
Source: E-Trade Financial survey, Oct. 1 - Oct. 10
For investors worried that the market is pinning too much on tax-reform prospects — especially as the GOP announced it had to delay by at least one day the release of its plan, which had been scheduled for Wednesday — sectors bets being placed by those with $1 million or more in brokerage accounts don't show an overreliance on any single factor.
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The sectors that these investors cited as having the most potential this quarter were more evenly cited. And these investors are dipping into some dogs of the market this year, such as telecom — 27 percent of million-dollar accounts said telecom was among the sectors with the most potential in the fourth quarter, up from 18 percent in Q3.
"Q3 was more heavily skewed," Loewengart said. "It's much more balanced now."
The big bet on the financials sector relative to other parts of the economy also narrowed based on the survey results.
Sectors with most potential in Q4
| Sector | $1 million+ Q4 | $1 million+ Q3 |
|---|---|---|
| Energy | 43% | 34% |
| Information technology | 42% | 39% |
| Financials | 41% | 62% |
| Health care | 41% | 46% |
Source: E-Trade Financial survey, Oct. 1 - Oct. 10
"Tax reform is an element, but it's something investors have been expecting since last November," Loewengart said. "It's still the case that investors are expecting meaningful tax reform to occur, and if we get an idea that it is in jeopardy, I think we will see volatility," he said.
Morgan Stanley released an analysis this week of how tax-reform failure would hit the markets, and its view is that even failure would not be a disaster. Loewengart said if tax reform is watered down, or even fail to gain enough votes to pass, it's already been factored into expectations.
Goldberg said there will always be performance chasing, and a policy mistake by any of the big four central banks — the Fed, Bank of Japan, ECB, and BOC — could be the biggest risk to investors. But there isn't much an investor can do beyond adjusting and rebalancing holdings, and setting an investment plan based on their financial situation.
"A rising market is no excuse to take on more risk than you could afford," he said.
