Currently, it seems that conservative millionaires are nervous about the stock market. It’s certainly true that the market has been something of a riddle this year. After reaching record highs in the early part of June, major stock indices, including the Standard and Poor 500, the Nasdaq​ and the Dow Jones Industrial Average, all took a tumble as tech stocks went on a downward slide. Following another interest rate hike from the Federal Reserve, these stocks are once again picking up steam, but the market still shows signs of wobbling. Spectrem Group’s most recent Millionaire Investor Confidence Index suggests that wealthy investors are viewing the markets with more caution than ever before.

Millionaires Are Nervous About the Stock Market Due to Political Concerns

The Spectrem report saw confidence levels drop by 17 points, with the index moving from 20 in April to just three in May. That represents the largest monthly decline reported in the index’s 13-year history. In addition, the Spectrem Affluent Investor Confidence Index dropped by four points, from 10 to six, marking the first time this index has surpassed the millionaire index since 2011. (For more, see The Number of Millionaires Continues to Increase.)

According to Spectrem head George H. Walper Jr., the substantial drop in confidence is linked to recent headlines surrounding the Trump administration’s connections with Russia, concern over whether tax reform would become a reality under Trump and questions about the recently proposed federal budget. Specifically, a perceived lack of cohesion in the management of the federal government is pushing some investors to doubt the stability of the markets.

Surprisingly, Republican millionaires were more likely to have lost confidence in the investment outlook than Democrats. That could be due to a failure on the part of the Trump administration to fully live up to its campaign promises. A recent Gallup poll revealed that Republican satisfaction with the direction of the U.S. has dropped 17 points since May. Overall, 39% of millionaires said that in the coming month they planned to avoid investing, a 15% increase over April. This is the highest percentage of millionaire investors pulling back on investing since December 2013. (For more, see The Top Republican Donors.)

Do the Fears Have Foundation?

While it’s evident that millionaires have some reservations about which way the market is headed next, are their concerns legitimate? The Fed’s most recent rate hike, which pushed the federal funds rate up to between 1% and 1.25%, paired with plans to increase rates again before the year is out, may be a sign of things to come.

Rate hikes are intended to keep the economy from overheating, but at the same they make the cost of borrowing more expensive. Consumer spending stabilized in May following a drop in April, but average spending is still at pre–Great Recession level highs. The latest quarterly report on household debt from the Fed shows that it has surpassed the peaks reached during the third quarter of 2008, increasing to $149 billion.

Americans have pulled back on credit card use but are still racking up other types of debt, notably mortgage, auto and student loans. If the cost of borrowing becomes too high, consumers might cut down on spending, which could impact the larger economy. If rate hikes occur too quickly, it could slow job growth and potentially result in higher inflation, with the markets seeing the fallout if companies that rely heavily on consumer spending see a slowdown in profits. (For more, see Inflation’s Impact on Stock Returns.)

The Bottom Line

In addition to raising rates, the Fed has also said it would move forward with plans to reduce its $4.5 trillion balance sheet, which from a market perspective is viewed similarly to a rate increase. What remains to be seen is whether the Fed’s moves will strengthen or weaken consumer-spending power and how that may carry over to the broader markets. In the meantime investors can prepare for possible impacts by reviewing their investments, reducing debt and taking advantage of higher yields on savings accounts to bolster their emergency cash reserves.

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