High investment rate amongst the wealthy could indicate a possible market bubble

There has recently been an increase in investment by a majority of wealthy investors as they believe the stock market is either in a bubble or approaching one, according to an E-Trade Financial Survey.

The survey finds that the response to the recent activities of investors with $1 million or more in a brokerage account, is to keep investing in stocks, especially in undervalued sectors of the market.

The results of the E-Trade surveyed conducted on millionaires showed:

• 46% think the market is “somewhat of a bubble”

• 29% think the market is approaching a bubble

• 16% think the market is “fully in a bubble”

• 9% think the market is nowhere near a bubble

Despite the rising rumors of a bubble in the market and the current economic situation, many investors are facing the market head-on. These investors have said their risk tolerance has increased and are ready to take on whatever the market brings. The majority of the millionaire investors expect stocks in the first quarter to end with more gains.

There have been increasing rumors about a market bubble, especially with the rollout of Covid-19 vaccines and prospects of a bigger stimulus package promised by President-elect Joe Biden. Investors are, therefore, looking ahead of the investment gains that could arise from these.

“There is a broader recognition of an economy that is improving and signs that the factors are in place for the market to move higher,” said Mike Loewengart, chief investment officer at E-Trade Financial’s capital management Unit.

The E-Trade Financial Survey was conducted between January 1-7, 2021. The participants were among an online USU sample of 904 self-directed active investors with at least $10,000 in an online brokerage account. The list comprised of 188 investors with at least $1 million of investable assets.

Here are some notable points from the E-Trade survey:

1. Millionaires are investing more than other investors at the moment: There are ongoing discussions, comments, and rumors about the market being overextended and a possible market bubble like the dotcom bubble. Amid all the chatters and rising fears of a market bubble, some wealthy investors are becoming more bullish in their approach toward the market. According to E-Trade, 64% of millionaires are bullish, up 9% from the 2020 fourth-quarter. These wealthy investors are not necessarily expecting large returns but expect a bullish response in the market.

2. More investors are tweaking their portfolios: A possible market bubble indicates high-risk. However, more wealthy investors have said that their risk tolerance is heightened, and are making changes to their investment portfolios. There are ongoing rotations into value stocks, small-cap stocks, and depressed sectors like energy and financials, and these investors are taking advantage of the times. Growth stocks have been the ones performing in the past few years, however, investors are now moving into more cyclically oriented sectors of the US economy.

"Everything outside of big tech became better potential opportunities,” said Loewengart. “There’s the momentum factor. People want to continue to believe where they’ve seen strong returns it will continue, but some recognize it can’t go up forever.”

Since the end of 2018, small-caps have underperformed the S&P 500, according to data from CFRA.

In his comment, Loegwengart added that the COVID-19 pandemic has changed the world forever and somethings may never return to as they were before the pandemic. This could mean that companies like big tech are set to see multiple expansion as the gains are hard to bet against.

“We can talk a lot about how the stay-at-home trade is over and other segments are poised to do better, but when we see sector expectations being similar, that is also a reflection of the market being tied to tech and the fact that the world has changed as a result of Covid,” Loewengart said. “Some things will not return to the way they were before, and we will see multiple expansion in big tech names.”