Why Grantham Says the Next Crash Will Rival 1929, 2000

If an investor with $ 1 million or more in the market thinks that the stock bubble is already here, or is about to emerge, what is the correct response? According to a new study by E-Trade Financial, the answer is to keep investing in stocks, focusing more on undervalued market sectors..

Only 9% of millionaires surveyed by E-Trade think the market is far from a bubble. Others say the following:

– 16% believe that the market «completely in a bubble»;
– 46% in «something like a bubble»;
– 29% think the market is heading for a bubble.

However, these wealthy investors are not fleeing the market or going into the cash. In fact, amid concerns about a growing bubble, these same investors say their risk tolerance increased significantly in the first quarter of 2021. Most investors expect stocks to end the first quarter with higher returns.

Introduction of the Covid-19 vaccine, even if it starts extremely slowly, and the prospect of another even larger stimulus package from the President-elect Joe Biden encourage investors to do what they should always do as the market develops – look to the future.

«There is growing recognition that the economy is improving and there are signs that there are drivers of market growth», – stated Mike Levengart, Chief Investment Officer, Capital Management, E-Trade Financial.

Morgan Stanley survey E-Trade, conducted from January 1st to 7th among an online sample of 904 independent active investors who manage at least $ 10,000 in an online brokerage account. CNBC-Specific Millionaire Data Includes Survey of 188 Investors with $ 1Million or More of Investment Assets.

The apparent contradiction in continued bullish sentiment during worries about bursting bubbles is not so obvious. This bull market has challenged all risk factors. Market experts still believe the path of least resistance is ahead. At the same time, a bullish rise may require some adjustments in the portfolio, with a focus on undervalued sectors of the stock market..

Here are some E-Trade survey results that show how investor thinking is shaping up now when there is a struggle between risk and reward..

Millionaires are more optimistic than investors in general

There is a lot of talk now about an overly bloated market and a situation similar to the dot-com bubble, which makes it difficult for many investors to get out of the market buzz. But the category of wealthy investors, even as their own concerns about the growth of bubbles are growing, are becoming more and more optimistic than investors in general. 64% of millionaires are optimistic about the future, and this is 9% higher than in the fourth quarter of 2020. By comparison, only 57% of the broader category of investors remain optimistic.

Among these investors, the percentage who said their risk tolerance increased in the first quarter increased by 8%. (from 16% to 24%). The majority (63%) said that it remains at the level of the previous quarter. Only 13% of millionaires say their risk tolerance has decreased.

According to Levengart, wealthy investors do not expect huge returns, with the largest investment group expecting the market to grow by no more than 5% this quarter. After strong gains in the markets, this is a safe albeit bullish reaction. 59% of millionaires expect another quarterly increase in the S index&P 500, while 43% of them see an increase of no more than 5%. The share of those who believe that the market should fall this quarter fell from 28% to 22%.

New changes are made to the portfolio

Everything more investors adjust portfolios. Rotation into value stocks, small cap stocks and depressed sectors such as energy and finance is already a well-defined phenomenon – the so-called «large rotation» – and these investors are no exception.

The proportion of millionaires who say they are making changes to their portfolio allocation grew by 6% for the second quarter in a row, to nearly one-third (32%). The percentage of millionaires converting money into cash remains very low (7%), but it has grown from 5% in the last quarter.

While stocks have seen better gains over the past few years than before, investors are seizing the opportunity to move into more cyclically focused sectors of the market..

«Anything that is not related to big technology has turned into the best potential opportunities», – Levengart believes.

Small caps are lagging behind S according to CFRA data&P 500 from the end of 2018.

The gap in price growth between S&P 500 Growth and S&The P 500 Value was the highest ever recorded last August (since the mid-70s) and is now, even after some stock rotation, as wide as it was in December 1999 during the dotcom crisis..

Price-earnings ratio S&The 12-month P 500 exceeds its 20-year average by 45%. CFRA Forecasts Increased Profit for Growth Component S&P 500 in 2021 at 13.3% compared to 20.1% for its value group.

Housewives’ interest in playing the stock market has passed its peak, but remains constant

According to the survey, even though millionaires are more likely to say that they are making changes to their portfolio allocation, sector S&The P 500 has not changed much depending on sectoral growth. Survey data showed that for every investor who takes part in a rotation, it is important to evaluate names and pay more attention to cyclicality. Since many still let their investment money miss the winners.

«There is an impulse factor. People want to continue to believe that where they have seen strong profits, they will continue, but some admit that they cannot grow forever.», – noted Levengart.

While interest in the financial sector as the sector with the greatest potential has grown slightly (up 3%) this quarter, there is little hope for a quick recovery. Overall, information technology and healthcare remain the main bets in this bull market. Healthcare (66%) and technology (53%) remain the two most popular sectors, with no decline in investor interest so far.

«We can talk a lot about housewife trading being over and other segments poised for growth, but when we see sector expectations are similar, this is also a reflection of the market’s link to technology and the fact that the world has changed as a result of Covid-19 – Levengart comments. – Some things will not return to their previous state, but we will see a manifold increase in large technology companies».

Investors talk about the approaching market bubble crisis

He added that investors should expect margins to be more modest given current estimates than the opportunity in cyclical sectors, where more incentives and vaccine introduction could lead to more significant cost increases.. «There is a potential for a change in the market leader», – Levengart predicts.

International market opportunities are more attractive

The data on the growing interest of American investors in investments abroad are more transparent and clear. Millionaires are showing more interest in investments outside the US, with the corresponding figure in the current quarter up 9%. The proportion of millionaire investors who said international markets were more attractive to them in the first quarter of 2021 rose from 27% to 36%.

«This is definitely a big step from the point of view of millionaires, a significant step», – Levengart stressed.

Over the past three years S&The P 500 outpaced the indices developed by the S&P for international and emerging markets. These international markets were last outperformed by the U.S. large cap index in 2017.

While the dollar has recently rebounded, its weakness in recent months is a key element in the dynamics of global equity markets..

«It makes the millionaire more opportunity-oriented.», – says Levengart.

How broad this new foreign interest is compared to China in particular is impossible to know from the survey data.. «China may be the only member “the big eight”, which in 2020 will have GDP growth. This is a clear indicator that the world outside the United States, developing countries, are moving away from the coronavirus crisis.», – expert thinks.

The political risk factor in the United States fell sharply

If political and election risk was the main factor in the fourth quarter, then this factor went away this quarter..

E-Trade’s research includes the second Georgia election and the Capitol riots that set the market another record, but on the biggest issue – the presidential election – millionaire investors are not as worried as they were last quarter..

The proportion of high net worth investors who view the new presidential administration as the biggest risk to their portfolio fell from 50% to 30% this quarter. At the same time, 26% of investors are pessimistic about the prospects for the US economy under the elected President Biden, while 60% expressed some level of optimism, from moderate (38%) to high (22%).

Meanwhile, market volatility has risen sharply among risk factors: from 18% of millionaires who consider this the biggest threat to their portfolio, to 27%, which is more than a quarter of those surveyed..

Millionaires are less at risk when it comes to the most risky assets

The latest phase of the bull market was marked by risk appetite for new offerings, IPOs and SPACs, as well as the rise of new asset classes such as cryptocurrencies, including bitcoins (Bitcoin).

Investors talk about the approaching market bubble crisis

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