Apple, one of the most widely held stocks in the U.S., went negative on the year on Friday. That's a good place to begin discussion of some revealing new stats from a survey of wealthy, experienced investors who trade $1 million or more in stock brokerage accounts. These investors have swiftly given up the uber-bullishness with which 2018 began and now believe that a likely end point for the second quarter is no gain at all for stocks. More of these investors believe that if there is any direction in stocks, it's more likely to continue down rather than up.
Only 40 percent of investors with $1 million or more in a self-directed brokerage account expect the stock market to rise this quarter, according to an exclusive survey data set of wealthy investors provided to CNBC by E-Trade Financial. That's a huge decline from 76 percent of investors in the first quarter who expected a market rise.
The percentage of investors who expect no gain in the second quarter went up, from 17 percent to 22 percent, but the biggest move was among investors who expect sizable losses. Twenty-three percent of wealthy investors expect stocks to drop by 5 percent this quarter, up from 5 percent in Q1. Eleven percent expect a drop of 10 percent, up from only 1 percent of investors who were that pessimistic last quarter. Overall, 38 percent of investors expect the market to be negative at quarter-end, up from 7 percent last quarter.
The mindset of the millionaire investor sometimes deviates with the broader set of investors, but not right now. These numbers match almost exactly the stock market sentiment from the broader group of investors surveyed by E-Trade with at least $10,000 in a brokerage account.
It's too late for this to be a surprise to anyone who follows the market: Volatility is back, and in a big way, and it isn't going away. If anything, the lack of volatility in 2017 seems like the anomaly, and it should be, based on market history.
"All investors, large and small, pro and amateur, everyone has to combat innate urges, the way the animal brain deals with fluctuations in the market," said Mike Loewengart, v.p. of investment strategy at E-Trade.
But the E-Trade official said one move experienced investors won't make is overreacting by dumping stocks en masse. "An uptick in volatility is a return to normal times for these investors. The VIX [volatility] index is now consistent with its intermediate to long-term average. ... This is the environment millionaires experienced while building wealth and they recognize that what happened last year wasn't typical. ... It's not surprising that when volatility did return it would be a significant matter with a sharp, quick move."
"Volatility is more painful for older investors in retirement than for younger clients with jobs," said Douglas Boneparth, president of Bone Fide Financial and a member of the CNBC Digital Financial Advisors Council, shortly after getting off the phone with a retired investor.
He said in his conversations with clients he is reminding them that there was a prolonged period of the market looking particularly good since the financial crash bottom coupled the volatility anomaly last year. Those factors combined to make the return of volatility "jarring" and also was a reminder of how easy it became to forget about volatility entirely.
Even if the big daily declines in the Dow Jones Industrial Average are much smaller on a relative basis than through history given the Dow's overall level, the return of "volatility wasn't small," Boneparth said. "The effect is that it's almost like people got sucker-punched in that region of the body that has grown soft. ... Investor psychology, I think, is a big contributing factor," to the change in view quarter over quarter, and the probability of a correction in the minds of investors.
Through the nine years of the bull market most investors were more confident on stocks than they were on the U.S. economy's prospects. That's now flipped.
The E-Trade survey finds that a wide majority of investors still grade the U.S. economy highly, with 71 percent saying the economy deserves an A or a B, but that is down from the uber-bullish reading of 91 percent in Q1. Those grading the U.S. economy at an A halved, down from 24 percent to 12 percent. Those grading the economy at a C saw the biggest increase, from 7 percent to 23 percent.
These investors also still believe the economy can handle more Fed rate hikes, at 66 percent, down from 81 percent in the first quarter.
"It's important to know they're still bullish and we have historically seen this set comfortable with volatility and it's all against the backdrop of a growing economy," Loewengart said. "They recognize the period of calm has been pierced and going forward they expect choppier conditions."
"The economy still looks good," Boneparth said. "Economic data points back up that claim. We look for glaring holes in the economy and in the data, whether its manufacturing, employment or wages, and it looks better than not. More good than bad," he said.
E-Trade also noted that Q1 was an outlier in terms of survey results, with many data points coming in at all-time high levels. That record confidence may have been a curse.
"Optimism makes millionaires nervous," said financial advisor Ted Jenkin of oXYgen Financial, and a member of the CNBC Digital Financial Advisors Council, who works primarily with Gen X and Gen Y investors. "There is a lot of optimism amongst wealthy people that the personal tax cuts, corporate tax cuts, and potential repatriation of money from overseas is really going to drive business and lift the markets. However, this is also what is scaring them."
Jenkin pointed to a topic that has received more focus since the tax cuts: the national deficit.
"Although not much seems to be written on this, many wealthy people are still worried about the $21 trillion in national debt. In fact, it is not that increasing interest rates scare them about a sluggish stock market, but rather what an increase of 2 percent to 3 percent would have on the effect of the overall national debt."
He said the hope among millionaires of late is that as rates climb it is not anything like the increase in rates seen in the 1980s, which millionaires he speaks to are convinced would have a "crushing effect" on the national debt.
If millionaires are staying in the market, they are more confident on financial stocks than any other sector. Tax reform, volatility, and more rate hikes are seen as a net positive for the sector and that has investors saying that financial stocks have the most potential in the second quarter versus all other sectors. The Financial Select Sector SPDR (XLF) is down year-to-date, but has been a winner over the past year and picked up this week post-big bank earnings.
(The E-Trade survey was conducted from April 1 to April 11 among an online U.S. sample of 947 self-directed active investors who manage at least $10,000 in an online brokerage account. The data on investors with $1 million or more is provided exclusively to CNBC. The survey has a margin of error of ±3.18 percent at the 95 percent confidence level.)
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