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Although January has gotten off to a strong start for the stock market, there's not a lot of confidence the market bottom has been reached, according to a survey of wealthy investors conducted this month by E-Trade Financial and provided exclusively to CNBC.
Recent trading patterns have contributed to renewed market optimism with headlines that the U.S. and China are moving closer to resolving their trade differences. The Dow Jones Industrial Average finished with a gain of 336 points on Friday and is up over 13 percent since Christmas Eve, posting its first four-week winning streak since August.
Yet despite the rally, there have been big increases in bearishness among investors with at least $1 million in a self-directed brokerage account.
They are much more likely now than they were during the volatile fourth quarter to take the view the U.S. economy is not strong enough for the Fed to raise rates. A rising percentage of these investors even believe we have already entered a recession. They are adjusting their overall asset allocation with defensive moves.
When last surveyed by E-Trade, these investors were dealing with heightened November volatility, though nowhere near the extreme dive that was yet to occur in December.
At that time, 62 percent of these investors remained bullish. In the January survey, that fell to 44 percent, with a majority 56 percent describing themselves as bearish when it comes to the current market. Only 45 percent of these investors believe the market will rise this quarter.
The historically conservative health care, utilities and consumer staples sectors are the only ones among the 10 traditional S&P 500 sectors to see significant increases in interest in the first quarter.
"They are in preservation mode," said Mike Loewengart, chief investment officer at E-Trade Capital.
ETF flows data for the first half of January corroborate the view that investor sentiment is less than bullish on broad stock gains.
Equity ETFs saw $3.6 billion of outflows even as stock indexes gained. That compares to $12.7 billion of inflows for fixed income ETFs through the first half of the month, according to DataTrek Research.
U.S. equity ETF flows remain negative on the year, with $11 billion in outflows according to XTF.com, despite the outperformance of U.S. stocks. Health care is one of the few ETF sector bets that has experienced meaningful inflows year-to-date.
"Health care is traditionally the recession-proof sector," Loewengart said. "Given where we are in the business cycle there has been a consistent uptick in interest in health care. This is what I mean when I talk about 'preservation mode' and becoming more defensive."
The 67 percent of wealthy investors who said that health-care stocks offer the best opportunity this quarter is the highest level of confidence expressed for a sector in the past three years of the E-Trade survey. Notably, the previous high reading for health care came in early 2016, at a time when some experts believe the U.S. went through a period that resembled a "mini-recession" and stocks experienced volatility.
Between December 2015 and January 2016, the market was down near-7 percent (that downward trend didn't cement, and by March 2016 stocks were on the move up again).
The percentage of investors who described the U.S. as in a recession increased to 17 percent from 7 percent in the first quarter. Now, only 35 percent of these investors believe the U.S. economy is healthy enough for additional Fed rate hikes, down from 69 percent in the fourth quarter of 2018. Investors who believe we are still in what can be described as a "peak" economy fell to 39 percent from 49 percent in January.
"I think the Fed talk right now is appropriate. Most Fed governors are talking about it's appropriate to pause. And I, you know, I was surprised when they did their last tightening," Fink said. "And let's step back for a second: investors have a real choice to pause, unlike the last ten years. They can put money in a money market fund, and earn close to 3 percent. That is another reason why we saw outflows and fixed income."
Wealthy investors who said they planned to move out of current positions and into cash increased to 15 percent from 12 percent in the January survey. And there was an increase in millionaires nibbling at the market after the huge fourth-quarter decline, with 13 percent saying they plan to move from cash back into market positions, up from 5 percent.
Still, the majority remain more hesitant.
"I don't think these responses show that a bottom has been reached," Loewengart said of E-Trade's latest survey. "We would see it in the asset allocation question and we not seeing it," he said, pointing to findings in the survey that show the majority of investors with $1 million or more in their accounts are planning no changes over the next six months.
Loewengart said the market rebound since Fed chairman Jerome Powell became more dovish in his comments — that is, less likely to raise rates soon — shows how important that change in the Fed's outlook has become to many investors. "The markets really calmed down after we saw Powell's change in posture."
Another swing factor is U.S.-China trade. It was cited by 71 percent of millionaire investors in the E-Trade survey as the biggest risk to investment portfolios — gridlock in Washington was a distant second at 40 percent. This suggests that if the headlines about the U.S. and China resolving trade their differences are real, investor sentiment could swiftly reverse.
For now, "they want to protect and don't want to make changes, but no one is heading for the hills," Loewengart said.
The E-Trade survey was conducted from Jan. 2 to Jan.10 among an online U.S. sample of 910 self-directed active investors who manage at least $10,000 in an online brokerage account. The segment of investors with $1 million or more in an online brokerage account is provided exclusively to CNBC and included 124 respondents in the January survey. The respondents are broken into thirds of active (trade more than once a week), swing (trade less than once a week but more than once a month), and passive (trade less than once a month).