Bull market’s largest hopes for 2022 relaxation with millennial millionaires

If the millennial and Gen Z investing generations’ biggest, boldest bull market calls are best represented by the star turn of ARK Funds’ Cathie Wood, her funds’ struggles in 2021 are a microcosm of where risk-on investing runs into the reality of a market that, at least in the short-term, can’t always go gangbusters — or even up.

Americans born into the millennial and Gen Z generations came of age as investors — and some millennials, now in their fourth decade of life, also into considerable wealth — during a period of extremely muted inflation and a decade-plus bull market. If they have never known a Cathie Wood stock call that can go south, inflation as the No. 1 topic of concern for the economy is a new experience for them as well. And fears of an inflationary environment the U.S. has not seen since the 70s and early 80s isn’t only new to them in the form of rising prices. The low-inflation world contributed to a high return world for growth stocks that is now being threatened, and that leads to a question about whether young investors have enough experience with the inevitable ups and downs of the stock market.

Are young investors prepared to see double-digit equity market gains as the exception, rather than the rule, for the S&P 500?

Not yet, according to a recent survey of millionaire investors conducted by CNBC.

The bi-annual CNBC Millionaire Survey finds the youngest among America’s wealthy investors much more bullish and aggressive headed into 2022 than their investing peers from older generations. While the overall outlook from millionaires on the economy and stock market is “barely bullish,” according to the survey data, millennials see major potential for stocks gains and continued interest in risk-on trades including cryptocurrencies.

Covid ended the longest bull market in history, but stocks picked right back up and have since posted extraordinary gains in what amounts to a 13-year run for U.S. equities. Even if it doesn’t end, can this level of market returns last?

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By the numbers:

  • 48% of millennials expect to increase their crypto investments in the next 12 months.
  • For many, that is a doubling down on crypto, as the survey finds more than half of the millennial millionaires said at least half of their wealth is in crypto.
  • 52% of millennials think the S&P 500 will be up by at least 10% next year (39% are even more bullish, expecting those gains to be above 15%). This is more than triple any other generation’s expectation for stock gains over the next 12 months.
  • 61% of millennials believe the economy will be much stronger next year; in all 93% believe the economy will be stronger, versus 41 percent for all millionaires.

The CNBC Millionaire Survey was conducted by Spectrem Group and surveyed 750 Americans with investable assets of $1 million or more. Caveat: Millennials are by far the smallest demographic sample in the survey. With the least time among generations to accumulate wealth, it follows there are many more Gen X, baby boomer and World War II millionaires in the data to accurately map the millionaire population of the U.S. The CNBC Millionaire Survey presents a snapshot of millennial millionaires, but it is only 31 out of the 750 wealthy Americans surveyed.

“Millennials are not a huge sample,” said Tom Wynn, director of research at Spectrem Group. “It’s enough to get some direction, but not huge, and we find that always in our surveys, they are way out there. I don’t know whether they are idealistic or just have an unrealistic view of things, but they are always extremely different,” he said.

And this is no different for investing than it is for taxes, or even religion.

Inflation, the Fed, stocks, and “stonks”

Some of the differences between millennials and the rest of the survey audience are stark. Inflation is the No. 1 economic concern among millionaires in the survey, while the millennial millionaire subset isn’t worried about it at all. And that finding highlights the generational nuances in the data and the question of whether younger investors are prepared for what inflation — and a Fed worried about inflation — can do to the stock market.

Lew Altfest, CEO of Altfest Personal Wealth Management, said most investors do think that in a Fed rate tightening cycle there is a greater chance of a correction next year, and overall, a lower return from the market.

Fed rate hike cycles haven’t been disastrous, but they have not been very good for stocks. Across the 17 previous Fed tightening cycles back to World War II, the Dow Jones Industrial Average and S&P 500 Index have struggled to post gains, according to CFRA Research. “Minor price increases for the equity market,” according to CFRA chief investment strategist Sam Stovall. In the 12-month period once the Fed starts raising rates at least three times, the S&P 500 rose a median of approximately 3.5%, and whether it gained or lost in any single period was little better than a coin flip: stocks gained in price 56% of the time.

The 1970s period of inflation was known as a “lost decade” for stocks because the compound annual growth rate in the S&P 500 was 1.6% — the index posted a 5.8% total return, but that is including dividends being reinvested and accounting for over 4% of the gain.

“They’re not thinking of double-digit returns and they are hoping they don’t get retribution for higher stock market prices,” Altfest said, referring to the price-to-earnings ratios which value-oriented investors such as himself find difficult to justify. “Value will have a run … stocks are going to go back to what are reasonable rates,” he said. “The question is the timing.”

A big millennial mistake and the market

There is some merit to the discussion about younger investors and inflation, says Doug Boneparth, president of Bone Fide Wealth, a wealth advisory firm, and a millennial himself. “The generation has not experienced an inflationary environment, and a boomer will be quick to point to 70s and 80s. When I talk to my own dad he doesn’t necessarily have the best memories of the 70s and 80s from an investment standpoint. Even myself, as an older millennial, I can’t recall investing or living through a non low-interest rate environment, so there’s something to say there.”

But this doesn’t mean he thinks 1970s-style inflation is about to repeat itself, and millennials may live in a world which they know is less likely to repeat that experience. “Anyone saying it’s going to be the 70s or 80s all over again, I’m not buying it. It’s a different world,” Boneparth said. “You didn’t have the internet or Amazon bringing goods to your door in 48 hours. It’s hard for young people to relate to what they do know historically about high inflation regimes,” he added.

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Even though millennials did not cite inflation as a risk to the economy, millennials in the survey were almost evenly split with 45% saying inflation would be temporary and 48% saying it would last a long time. This split within the generation itself brings to mind a point Boneparth says needs to be made when we start talking about “millennials”: the idea that millennials are a monolithic generation is a mistake.

“There are 80 million millennials and some can be viewed as just becoming adults, to full-fledged adults with children,” said Boneparth, who is closer to 40 than 20 and a homeowner with children.

It is an even bigger mistake, he says, when people assume that all millennials believe the stock market will only go up.

“It is a pretty big range and does mean some have been through different market cycles,” Boneparth said. “I’m old enough to know what a bad market looks like, in 2008-2009. For older millennials, the feelings and thoughts are alive and well. They shaped the older end of the millennial generation,” he said.

Though for millennials and Gen Z investors in their 20s who were just becoming teenagers during the Great Recession, recent performance could lend itself to overconfidence in the stock market. “And that could shape how they are investing their money,” Boneparth said. “I don’t think that stigma of 08-09 will ever escape my mind at 37. But you almost certainly get a ‘stocks are stonks’ often out of Gen Z, who are all about everything in a good way.”

Long-term returns and low returns

Market experts are worried that the extraordinary returns stocks have produced in recent years cannot be sustained. A recent survey of 400 investment professionals conducted by CNBC finds more than half (55%) expecting the S&P to return less than 10% next year. And more think the index will either be flat or down than up by more than 10%.

Most millionaires taking the CNBC Millionaire Survey believe their assets will be the same at year-end 2022 and they anticipate a rate of return between 4%-5% in 2022 — though since many are retired, they have a much more conservative asset allocation. Millennials believe their rate of return will be higher, with 39% predicting 10%-plus in 2022, and another 32% expecting at least 6% to 10% from their investments.

Every year, the major fund companies, such as Vanguard Group, release their investment return assumptions, and in recent years, the predictions for a lower return world haven’t been proven correct. For the record, Vanguard’s 2022 outlook says U.S. stocks are more overvalued than any time since the dotcom bubble, but there is no clear correlation in the historical data saying that inflation and rising rates will necessarily cause an abrupt end to the valuation momentum. “Our outlook calls not for a lost decade for U.S. stocks, as some fear, but for a lower-return one,” Vanguard concluded.

“It’s always best to be as accurate as you can, but since being accurate is hardest thing to do, the next best thing is to overdeliver,” said Mitch Goldberg, president of investment advisory firm ClientFirst Strategy. “In next 10 years, we expect a positive return of anywhere from 5%-8% annualized. I’m comfortable saying that, but I’m not comfortable saying next year only expect 5%.” 

There is an important distinction in how investors think about the rate of return. A diversified portfolio is not a 100% stock portfolio. When firms assume a 4% to 6% annual rate of return, that is assuming a mix of stocks and bonds, even if stocks are the majority. The S&P 500 has averaged an annual return of 9% since World War II, according to CFRA.

Boneparth says regardless of how well the stock market has been doing, issuing conservative return assumptions for clients is the proper communication to make annually. When he does forward-looking returns, he pegs a 5.3% return on a risk-adjusted basis for an 80-20 equity-bond portfolio. “When the market keeps pumping out returns, you have to go back to the 60 to 80 years history,” he said. History is only “wrong” right now, he said, because of the microenvironment of the past 10 years, from recession to expansion and Covid and through it all, multiple phases of monetary stimulus.

“Professionally speaking, you want to temper expectations about what returns can look like,” he said. “Every year S&P predictions are wrong, so millennials may be thinking ‘their guess is as good as mine, but when I am doing planning, I am being conservative in assumptions on rates of return in market portfolios,” Boneparth said. “Because I am trying to build a margin of safety, so if you are up 10%, you are way ahead of the curve.”

Younger investors have more time than any other generation to accumulate wealth, and tied to that, more reason than any other generation to remain aggressive in their portfolio allocations. This doesn’t mean their short-term optimism will be proven right, but staying in the market with a significant allocation to equities over the long-term is the right decision, as long as short-term success in the market does not breed hubris.

How to become a great investor

“Ask any fabulously successful entrepreneur how long it took them to become a competent investor and they will say five years; incredibly, it takes five years before you get your sea legs,” said Michael Sonnenfeldt, founder and chairman of Tiger 21, an investing network for the wealthy. He learned the hard way that early success in stock market investing does not ensure continued success. “The worst thing that ever happened to me in college was I bought options as my first investment and they doubled or tripled. That was the most expensive financial lesson I ever had because it completely inflated my confidence,” he said. “I had to lose many times what I made to understand those bets I made were luck and nothing more than luck.” 

Yet the current world is one in which investors have been forced, by economic and market conditions, to learn that equities are the way to generate market wealth. A generation ago, when there were much higher interest rates, debt investments could do a better job of helping a balanced portfolio beat inflation.

“In the low interest rate environment, a subset of people are learning how to drive returns through equity, whether private or direct or public,” Sonnenfeldt said. Even with rates set to rise in 2022, they will remain at what are very low levels compared to history. “They really have to work those assets and that may be part of what’s going on, people learning how to work their assets to beat inflation will have a very different view than we had a generation ago,” he added.

One finding that is consistent across members of the Tiger 21 affluent investing network is less reliance on the stock market for returns. In the past few years, venture capital has become much more prevalent among members and, in general, stocks do not make up the majority of an investor’s portfolio. Even as younger investors have high hopes for the S&P 500 next year, and generate a significant portion of their wealth from cryptocurrency, the CNBC Millionaire Survey did find their portfolios to be much more diversified than older investor peers — who tend to stick more to a traditional equities, fixed income and cash mix — millennial allocations to international, alternative assets and private markets are similar to public stock market weightings.

“My returns won’t mirror public market returns, and if I didn’t know any better I would say, geez, I should be unhappy,” Sonnenfeldt said. “But if I am north of 10% and still dramatically less than the public markets, it could be an incredible year, knowing no matter what happens in the market I may duplicate those returns again.”

Whether the S&P 500 repeats its nearly 30% gain of 2021, or reverts to its long-term annualized average of 9% in 2022 — or takes it on the chin — being realistic about the long-term, and having a plan for it, is more important than being remembered as the one who got next year’s S&P 500 call right. 

Preserving wealth, while covering living expenses and taxes, is the No. 1 goal, and that requires a realistic understanding of what can be earned from investments year in and year out. And over a longer period of time, with more time in the market, the best young investors will learn to adjust expenses to that realism.

“Optimism and realism are not the same thing, and many people are optimistic but not every realistic,” Sonnenfeldt said.

Millionaires wish to personal rather less of all the pieces bubble subsequent yr

A trader blows chewing gum during the opening bell at the New York Stock Exchange on August 1, 2019 in New York City.

Johannes Eisele | AFP | Getty Images

If the market is in an everything bubble, wealthy Americans go into 2022 saying they really don’t want much more – of anything, according to a recent CNBC millionaires poll.

Sentiment among wealthy investors is still trending upbeat, albeit flagging, with millionaires anticipating higher interest and tax rates in 2022. 41 percent of millionaires say the economy will get stronger in the next year, up from 35 percent who say it will weaken the last year CNBC millionaires survey. A little more than half, or 52%, of millionaires expect it S&P 500 Finish 2022 with a profit of 5% or more.

But another result of the survey is the most revealing. It signals a weakening of excitement and a waning general risk appetite, even though the market has survived recent Covid-Omicron and Fed fears that the S&P 500 is setting a new record and the Dow Jones industry average stay close to the highest level ever.

Twice a year, the CNBC Millionaire Survey asks investors in which key asset classes they want to increase their exposure over the next year. Investor appetite for all types of investments is now lower than it was in the spring 2021 survey. The percentage of millionaires who say they will increase their investments has declined across all asset classes, including stocks, investment property, alternative investments, international investments and precious metals.

For the CNBC Millionaire Survey, Spectrem Group surveyed 750 Americans with investable wealth of $ 1 million in October and November.

Can’t take any more risks, can’t get out of the market

“The market is high and people are nervous,” said Lew Altfest, CEO of Altfest Personal Wealth Management. “Our customers are scared, but none of them are about to get off,” he said. “You don’t have the courage to withdraw.”

“There’s not much more you can risk with fresh dollars,” said Doug Boneparth, president of Bone Fide Wealth. “What are you going to do? Ditch all of your large caps and invest in all emerging market stocks? Nobody does.”

Thirteen years after a bull market and after a sharp spike in volatility last year resolved by government incentives and the Fed to print more money, “there is limited scope to move up, so maybe take your foot off the pedal here.” , “Said Boneparth.

That doesn’t mean market conditions that would amount to a significant reduction in risk, but it makes sense for people to step back and re-evaluate their portfolios. “It’s been a hell of a ride and the willingness to take risks has only increased in the not too distant past,” he added.

Inflation, the Fed and the Economy 2022

Even if the rich are less avid buyers of stocks, they are buyers of goods and the economy will be fine – and with it corporate profits – as long as they continue to buy everything outside of stocks at higher prices, Altfest said. When people tire of spending freely, it matters more to the economy and the market than when the rich cut back risk appetite across all asset classes, he said.

After two hugely positive years for the market in 2020 and 2021, investors are digesting the information on inflation and whether that means they should expect slower equity growth in the near future.

“These two things set the table: how much more risk can you take?” said Boneparth.

“The shyness is very evident at all of our meetings,” said Michael Sonnenfeldt, founder and chairman of Tiger 21, a network for wealthy investors.

But inflation is not an immediate threat to the rich. “If you’re worth $ 10 million and living on $ 200,000 a year, even if you’re 6% inflation, inflation won’t change your lifestyle,” said Sonnenfeldt. For the rich, fear of inflation does not mean the less fortunate in society are justified in worrying about food budgets or buying a new car. But one cannot ignore the fact that inflation can hurt the value of their assets, Sonnenfeldt said, and that makes it harder to weigh inflation against investments after investors have benefited from such an extraordinary market.

“Assets have risen more than inflation this year, more than they eroded … but next year could be a double blow where if inflation grows and the market is flat you see a loss in value,” he said. “At least there was no need to panic this year and wealth custodians grew assets faster than inflation as the Fed flooded the market. I don’t know many people in a phase of wealth preservation who haven’t outperformed inflation this year. “.”

“People are still digesting Covid and the elections, and that’s kind of a wait and see,” said Tom Wynn, director of research for the Spectrem Group. “People have to see what happens to inflation and taxes, and no one takes a position one way or another that things are much worse or better, that’s my opinion.”

Big stocks and boomers

Altfest said he wouldn’t advise an investor to time the market to be all or not at all, but he has told investors sitting on huge gains like Microsoft that it is time to sell some of their holdings. This is not a conversation that always went well, he said.

“A lot of people say, ‘The market has done me good,’ and that is especially true for people with growth stocks,” said Altfest, adding that much of the recent profits in the S&P 500 came from four technology companies, including Microsoft.

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When investors turn back to core stock analysis, “you can’t break away from price-to-earnings multiples even if corporate earnings are growing fast. They can’t grow forever and the P / E ratios” are very high, “Altfest said.

Pressure between the title winners, who have done so well but worry about future economic and market developments, puts investors in what Alftest describes as “barely optimistic about stocks”.

Mitch Goldberg, president of the investment advisory firm ClientFirst Strategy, said every time someone told an investor to “take a little off the table at Apple and Microsoft … someday right. But we don’t know when. “

Risk the right way

An investor who hasn’t changed their portfolio this year will now hold more stocks by simply staying stable, given the recent bull market in equities and weak bond market returns, Goldberg said. And many investors are not quick to realign their equilibrium after appreciation in certain asset classes, which reinforces the process of increasing exposure, in this case to stocks. And Goldberg said for most investors that they will stick to that stance.

“There is no alternative,” he said. “From what I see, investors are more scared, but they don’t act on them,” he said. “To me, that’s a form of complacency. It’s like waiting for a bell to ring and they’ll be able to get out before the market fills up.”

Older investors who do not need market money to meet immediate needs, including baby boomers who have done well in the equity space and remain in the market time horizon for at least several years, do not need to reduce their overall equity exposure, but should do so by reducing the composition of the stocks in the Think about ownership, said Goldberg. While they have stayed away from the meme stocks and the pandemic stocks, they have also added the value of stocks in other parts of the market like consumer staples and dividend stocks and major technology leaders.

Taking risk off the table doesn’t have to mean making major changes to the overall portfolio asset allocation plan.

Boneparth said, in his view, “taking risk off the table” can mean going from a 90% to 10% stock split to 80% to 20%.

Downshifting from “aggressive to just plain aggressive” shouldn’t make an investor jump out of his seat, he said.

Many investors make the mistake of withdrawing completely from a market, Boneparth said, and that “smart money” approach tends to be a loser. But, he said, “those are returns so far above their historical means that it really always asks, ‘When is that right?'”

Let’s not get out of hand. Let’s context to less risk, not drastic change, not even decrease, just adding, ”said Boneparth.