A man runs past the New York Stock Exchange (NYSE).
There already have been six new all-time highs for stocks in the 12 trading days of 2020, putting the S&P 500 up close to 3% since the year started. After a 2019 in which the equity index gained over 30%, is it too much, too fast?
Not according to hedge fund billionaire David Tepper. He may have used the wrong beast to refer to the raging bull market, but he told CNBC on Friday, “I love riding a horse that’s running.”
He is far from the only one who sees no reason the relentless bull market has to end. A new survey of Americans with at least $1 million in a brokerage account and who trade stocks regularly on their own shows that the majority are upbeat on the U.S. economy and stocks. Just a quarter ago, that was not the case.
In Q4 of last year, even as stocks gained, millionaires were cautious and possibly worried about a repeat of the plunge in the fourth quarter of 2018. Now 76% of these wealthy investors grade the U.S. economy highly, and there has been a 16% increase in investors who expect the market to rise by as much as 5% this quarter, according to an E-Trade Financial quarterly survey provided exclusively to CNBC.
The fears of a recession stoked by the inverted yield curve, sluggish global growth, and the ups and downs in the trade war headlines that created uncertainty for much of 2019, are no longer weighing on the investor outlook. Rather than viewing the continued gains as a reason to pull back, something closer to fear of missing out has taken hold of the market. The percentage of investors who indicated a belief that the business cycle is currently in an expansion went up to 34%, from 20% in Q4 2019. The majority continue to describe the cycle as being at a peak (54%).
Investors in risk-taking mode
“Investors are more open to risk taking at this point,” said Mike Loewengart, vice president of investment strategy at E-Trade. “If the environment is encouraging and conducive to additional gains, they want to be part of it.”
Twenty-nine percent of these investors said they plan to make changes to their portfolio allocations in Q1, up from 21% in Q4 2019, which Loewengart attributed primarily to annual rebalancing, though he added, “it’s encouraging to see investors not just hiding out in cash.”
Loewengart said while it is hard to ignore the fact that the record expansion run for stocks is now over a decade, there are reasons why investors are more comfortable. While an election year can introduce volatility, it also should lead the Federal Reserve to be consistent in messaging in an effort to stay out of politics. “The Fed will be in an accommodative posture for the year and you couple that with other elements — progress on the trade war and a tight labor market, decent consumer metrics — and all of it points to additional opportunities in equities,” the E-Trade official said. “And millionaire investors don’t want to miss out.”
The E-Trade survey was conducted between Jan. 2 and Jan. 10 among an online U.S. sample of 909 self-directed active investors. The millionaire data set, provided exclusively to CNBC, is comprised of 197 investors with $1 million or more of investable assets.
Reasons to be cautious
Billionaire Tepper told CNBC on Friday that at some point, “the market will get to a level that I will slow down that horse and eventually get off.”
And to be sure, there are reasons to be cautious. The S&P 500 has not been valued this richly since 2002 (by at least one measure, it has never been so high). Much of last year’s gains were fueled by multiple expansion rather than improved business performance. And it has been running red-hot, up 11% in the past three months.
“You can’t keep on expanding multiples. You have to have earnings follow in a meaningful way,” said long-time bull and Wharton financial professor Jeremy Siegel to CNBC on Friday. “At this point, we have not seen earnings following a meaningful way.”
Siegel said the market is becoming more and more vulnerable to a 10% sell-off.
“Any little thing could trip things up. You know, earnings disappointments. … whatever bump that happens. Is Iran completely over? Is it solved? Do we have nothing to worry about in Europe or anywhere else internationally?”
More than 8% of the S&P 500 index has reported quarterly results so far, according to FactSet, and 72% of those companies posted better-than-expected earnings.
“We didn’t have much in the way of earnings growth last year,” Chris Marx, senior investment strategist for equities at AllianceBernstein, told CNBC on Friday. “But we do expect to see reasonable earnings growth if people’s confidence holds up, and that should be constructive for the market.”
Loewengart said there are signs of cautious optimism in the E-Trade survey response. While the percentage of millionaires who expect the market to rise this quarter reached 58% (up from 42% in Q4 2019), the vast majority of the bulls (45%) expect at most a 5% gain. “To me that’s a realistic take,” he said.
Market watchers have been closely eyeing a “massive rotation into value” and out of momentum stocks — value stocks have outperformed growth stocks in recent months after years of underperformance. The wealthy investors surveyed by E-Trade indicated increased interest in dividend stocks (up from 34% to 41%) and slightly less interest in fixed-income exposure (down from 31% to 26%).
“Millionaires are more experienced and recognize dividend payers will be more fundamentally sound stocks. We see investors wanting to participate in the market after the considerable gains we’ve had, and they want to do it in the fundamentally strong franchise names,” Loewengart said.
But the survey does find investors turning away from some of the most defensive stock market plays. On a sector-by-sector attractiveness basis, the biggest declines in interest quarter over quarter were in utilities and consumer staples. And information tech (49%) and health care (48%) remain the sectors that investors think have the most potential.
Millionaire investors by the numbers
69%: Of millionaire investors describe themselves as bullish.
69%: Of all investors age 55 and older are bullish.
53%: Of all investors age 25-34 are bullish.
58%: Of millionaires expect the market to rise in Q1, up from 42% in Q4.
40%: Are interested in markets outside the U.S. in Q1, up from 29% in the final quarter of 2019.
65%: Of all investors age 25-34 are interested in markets outside the U.S.
28%: Of all investors age 55 and older are interested in markets outside the U.S.
17%: The decline among investors saying consumer staples offered the most potential, from 38% in Q4 to 21% this quarter.
49%: Say the information technology sector offers the most potential this quarter. Health care (48%) is second.
Gains have been dominated by a handful of big tech stocks — Alphabet became the latest to reach a trillion-dollar valuation on Thursday and some on Wall Street expect that trillion-dollar march to slow from here.
Loewengart said concerns about a rally led by stock multiple expansion rather than earnings strength should be taken into account, but those fears can be countered by a market now led by dominant technology companies and a technology industry that did not exist a few decades ago and continues to experience significant growth. “The dominant tech names are still growing. … For now, with accommodative conditions in place, it stands to reason these dominant companies are well-positioned to produce.”
He said the sector data “speaks to the fact that investors want to take more risks now. There’s still interest in tech, if a little less,” the E-Trade official said.
The E-Trade survey does find investors pursuing a relative valuation strategy when it comes to international equities, which were out of favor last year. Forty percent of millionaires said the health of markets outside the U.S. appeals to them this quarter, up from 29% in Q4 2019.
“Overseas we’ve got accommodative policy from central banks around the globe mitigating some risks, progress on the Brexit front and the trade deal in the U.S., and let’s not forget the fundamental metrics for international are compelling when compared to the U.S.,” Loewengart said.
Over the past 12 months, the U.S. stock market has roughly doubled the rest of the world’s stock market return.
Private equity giant KKR recently wrote that there are opportunities elsewhere as U.S. investors already have priced in a “robust economic recovery” while its models suggest “only a modest recovery” for corporate earnings that have been in recession for what could be the fourth straight quarter to start 2020.
Fear of missing out
The FOMO — fear of missing out — market did not come out of nowhere.
Last November, Bank of America Merrill Lynch’s regular survey of global fund managers found that global fund managers’ cash levels posted their largest decline since President Donald Trump’s 2016 election as investors rushed to take on risk.
Global growth optimism had surged by the most in 20 years to 18-month highs, a sign investors expect better manufacturing and profit numbers worldwide. By the time of the bank’s December survey, recession concerns plummeted 33 percentage points. Manager allocations were at a net 31% overweight equities in December, the highest level in a year while bond exposure was at its lowest weight in a year.
“It is all-in on the FOMO market,” said Mitch Goldberg, president of investment advisory firm ClientFirst Strategy. “The fact is, this is what you want if you are already invested. Let the demand for stocks make you money.”
“Before we had the acronym ‘FOMO’, markets like this were described as irrational exuberance and risk-on,” he said. “Most stocks are above their moving averages, which is very bullish. It’s also bullish to see bank stocks second half rally from last year continue into this year.”
Goldberg said it is natural for investors — not just hedge fund billionaires like Tepper — to wonder when to jump off.
“That’s what investors really want to know,” he said. But he added, “markets like this don’t come every day. Someone shouting that stocks are overvalued every time we go into rally mode isn’t helpful. It’s often just hyperbole.”
Goldberg said the best way for individual investors to proceed is not to think of all-or-nothing decisions, which is basically market timing, “of which investors have a lousy record.”
He said investors can always take profits in individual stocks based on predetermined price points to sell (one way is to use limit orders). And investors should always know the upper limit of how much an individual stock or sector should represent in their overall portfolio. “These are discipline steps, not guessing steps. Incorporate more of these and you’ll be less likely to be a FOMO investor.”
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