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Federal Reserve Chairman Jerome Powell isn't the only market player who may be guilty of a little capitulation.
Millionaire investors began 2019 with major reservations about the stock market, but as the Federal Reserve's abrupt about-face on interest rates takes hold as the new normal in monetary policy, the wealthy have decided that the stock market rally will continue.
An E-Trade Financial survey of investors who manage $1 million or more in a self-directed brokerage account shows that the majority expect stocks to continue rising in the second quarter. In Q1 only 44% of millionaires said they were bullish; now that figure is up to 66%. In Q1 only 45% of millionaire investors said stocks would rise. Now, after the huge surge in stocks through the end of the first quarter, 62% of millionaire investors think stocks will continue higher through the second quarter. Only 15% think stocks will fall, down from 36% in Q1.
The VIX — the market's volatility barometer — which had spiked by more than 150% in 2018, hit its lowest level since October this week.
When the Fed's began signalling that its view on further rate hikes could change, stocks were just beginning to rebound from huge fourth-quarter losses, and that was still fresh in the minds of investors, said Mike Loewengart, chief investment officer at E-Trade Capital.
"Fed policy is one of the key risks, obstacles to further gains, and it is no secret there is political pressure on the Fed in a public manner," Loewengart said. But he added it would be wrong to think the Fed's shift was all about President Donald Trump's tongue-lashing. "I don't think we can discount weakness in the data and weakness in data that they have traditionally looked at."
Even as the Fed has become more concerned about economic headwinds, wealthy investors are showing a slight increase in economic confidence. Millionaire investors who gave the U.S. economy a grade of A or B in the second-quarter survey increased to 77%, up from 67% in Q1. The percentage of wealthy investors who gave the economy a C, D or F all decreased.
Though the Fed headlines clearly have influenced investors' view of rates. The percentage of these investors who said the economy is healthy enough for more rate hikes declined from 35% in Q1 to 24% in Q2.
"We have a risk of a melt-up, not a meltdown here, " Larry Fink, CEO of the world's biggest asset manager, BlackRock, told CNBC on Tuesday. "Despite where the markets are in equities, we have not seen money being put to work," Fink said. "Many people thought we were going to be in a period of rising rates. We were not, and we saw huge underinvestment and people had to rush into fixed income," he said. "We have not seen that in equities yet."
Equity ETFs have taken in near-$30 billion in new flows from investors this year; bond ETFs have taken in near-$40 billion, according to XTF.com data.
Stocks gained 13% in the first quarter, and for chart traders that surge is a bullish sign. According to BMO, every time scored a gain of 10% or more in the first quarter of a year since 1935, the market climbed 6% more on average for the rest of the year, with positive performance during 11 of the 12 times.
Loewengart said if there is more stock-buying to come, it is important to note that the data doesn't show these wealthy investors holding expectations for huge gains. While 62% of survey respondents said stocks will rise through the end of Q2, 44% expect the rise to be limited to at most 5%. Only 14% expect a rise of 10% or more.
He thinks what we are seeing from millionaire investors is a renewed belief that the stock market typical of the decade-long expansion during the Fed's post-crisis dovish policy has a little room left to run. "The expansion is not over," he said.
J.P. Morgan CEO Jamie Dimon said last week on the Wall Street bank's earnings call that the U.S. economic expansion "could go on for years."
The percentage of wealthy investors who described the current business cycle as being in the peak phase increased from 39% in Q1 to 47% in Q2, while the percentage of investors who described current conditions as being the expansion phase rose from 27% to 36%.
"We know that in such an environment, which persisted for a good portion of the last decade, those modest levels of growth, if they persist, are accommodative for risk assets, including stocks," Loewengart said. "We're at the sweet spot of the bell curve of data in having more modest — one could even say more reasonable — expectations for returns."
He added that expectations for a trade deal between the U.S. and China are also probably helping to make investors more confident. The survey found that the wealthy still view the trade war as the biggest risk to their portfolio, with 64% citing it, down slightly from 71% in Q1.
The E-Trade official also noted that these millionaire investors — who likely have many years of experience through market ups and downs — did not indicate they had major changes planned for their overall portfolio allocations, even as they become more bullish on stocks. Forty-nine percent said they plan to make no changes this quarter.
"These are measured responses. I call it a business owner approach to markets, business owner approach to investments," Loewengart said. "Long-term expectations for domestic stocks in particular are single digit, mid-single digit returns at higher end. … These investors are still positive, the vast majority think stocks should go up, but more modestly in terms of overall gains."
As the wealthy become more comfortable with the stock market, fears about the housing market are rising. The percentage of millionaire investors who cited the housing market as the biggest risk to their wealth rose from 4% in Q1 to 19% in Q2.
"These are people who own homes and second homes and maybe income properties," Loewengart said. "They have exposure to real estate and can see that market softening."
While the reversal on interest rates may be a short-term boon to first-time homebuyers and nationwide home prices as mortgage rates head back down, the wealthy have a different focus when it comes to property. "All of a sudden the apartment they thought would sell for $2 million in Manhattan may sell for $1.5 million."
Manhattan luxury sales, which were falling throughout last year, just turned in their worst quarter since the financial crash and have been down for six straight quarters.
"Cooling in the residential real estate market will impact other spending decisions," the E-Trade official said.
The E-Trade survey was conducted from April 1 to April 11 among an online U.S. sample of 917 self-directed active investors. The millionaire data set is comprised of 177 investors with $1 million or more of investable assets and is provided exclusively to CNBC.