• Just under half (49%) of investors with $1 million or more in a stock market brokerage account think the market will end the second quarter with a gain, according to a quarterly survey from Morgan Stanley's E-Trade.
• The sectors where the wealthy are willing to put their money to work remain focused on inflation, including energy, commodities, and real estate.
• Millionaires have come to terms with market volatility and are now more likely to say valuations have deflated from bubble levels, but the number of those moving more assets to cash rather than back into the market has ticked higher.

It's been a tough year to be an investor, and the wealthy are no exception. Losses in both stock and bond markets this year have made portfolio conversations between Wall Street investment advisors and clients more challenging. The most conservative portfolios have done as poorly if not worse than the riskiest portfolios, with bonds offering little in the way of protection. But if there's a moment when the majority of wealthy, experienced investors call an all-clear on recent equities' volatility and buy-the-dip in stocks, this isn't looking like it.

Less than half (49%) of investors with $1 million or more in a brokerage account they self-direct think the S&P 500 will end the second quarter with a gain, according to the results of an E-Trade quarterly survey of millionaire investors conducted in April and shared exclusively with CNBC. Bullishness among this demographic dropped from 64% to 52% quarter over quarter.

"We're coming off a really volatile quarter and as expected, bullishness took a dip in response to what was going on in the market," said Mike Loewengart, managing director of investment strategy for Morgan Stanley's E-Trade Capital Management.

The data points on the S&P 500 and overall sentiment are split almost right down the middle, and so they can be read as either glass half-fall or half-empty. Twenty-eight percent of investors surveyed by E-Trade expect a modest rise in stocks this quarter, and 18% think the market will end the quarter no worse than flat. But a closer look at the survey results shows that many investors remain reluctant to make a bet the bottom is in for stocks, a view this week's selling has reinforced.

"Investors have come to grips with the new reality we collectively face as investors," Loewengart said.

Because of what's happening in stocks and bonds there will be opportunities to deploy capital, he says, and the survey finds there are pockets of investors seeking new opportunities, but primarily with a posture that remains defensive and geared to inflation as the dominant force in investment decisions.

"The current environment is challenging for all investors. Millionaires are a bit more seasoned and they recognize that volatility is part of the process with equities and we have to accept it. But millionaires can see through the near-term pressure and are waiting to pick their spots," he said.

In fact, volatility is now so expected that the percentage of millionaires who said it was the biggest risk to their portfolio dropped quarter-over-quarter from 48% to 36%.

The survey was conducted during the first two weeks of April among 130 individual investors with at least $1 million in brokerage accounts, before the most recent days of deep dives in stocks, including Tuesday's heavy selling. But it was conducted coming off what had been a brutal quarter for investors.

While the stock market was attempting a comeback on Wednesday, the first quarter declines and recent heavy days of selling have the Dow Jones Industrial Average and S&P 500 Index both more than 10% off their 52-week highs and the Nasdaq Composite off by over 20%.

The Fed and the risk of recession

A good place to begin to parse how wealthier, more experienced investors are feeling right now is with the Fed, raising interest rates to combat inflation but at the risk of pushing the economy closer to recession as a result.

More experienced investors do generally understand that the economy and the market are not the same thing, and the Fed's hawkish shift into a rate hiking cycle is a direct byproduct of just how strong the economy is, with the Fed raising rates because the economy is overheated from a price perspective, and convinced the economy is healthy enough to handle it.

But there is a disconnect between the 38% of these wealthy investors who expect a recession and the 68% who say the economy is healthy enough for the Fed to enact rate hikes. Another finding from these investors which shows how difficult it is to assess the Fed right now is that millionaires are forecasting only two to three Fed rate hikes. This could mean one of two things: either these investors are thinking in terms of 50 basis point or 75 basis point hikes, and two to three could represent a full cycle if the Fed gets more aggressive earlier in the rate hike cycle, or they could be expecting that the Fed will push the economy into a recession after only a few rate hikes.

"That's the key question right now for all investors, big or small, or individual or institution: will the Fed have to resort to such significant measures that the only way to tame inflation is to put the economy into a recession?" Loewengart said. "We don't know the answer. We hear a relatively rosy sentiment from the Fed, but history doesn't support the likelihood of a soft landing. But it is also a unique time. We are in somewhat uncharted territory right now," he added.

While inflation, not market volatility, is the top portfolio risk cited by these investors, the 38% who cited risk of recession was a notable jump from 26% last quarter. 

Raising cash at a time of inflation

As stocks have sold off, some froth has come off the top of the market, and that has led to a decrease among millionaires who think the market is in or near a bubble, from 71% last quarter to 57% in April. But this isn't leading them to increase risk appetite.

There was a decline among investors saying they will make no changes to their portfolios, from 44% to 36%, and that is a "significant downtick," according to Loewengart, for a group of seasoned investors who understand that markets don't always go up. "Investors shouldn't make rash decisions under duress in the current market, but picking their spots and making rational decisions doesn't mean not doing anything," he said.

At the same time, more investors indicated they were adding to cash, not in large numbers, but a notable increase given the decline in stock prices that already had been experienced, rather than to the most beat-up sectors like technology. The percentage of millionaires who said they were adding to cash as a result of rising rates went from 24% to 31%, while there was also a 7% jump in millionaires who said they were investing in treasury inflation protected securities, from 25% to 32%.

Cash is a conundrum at a time of inflation. It is not going to help in an inflationary environment, but the concerns about ongoing market volatility explain the uptick in cash positions among investors. More volatility means more downside risk for equities and cash is just perhaps the go-to place to ride it out.

Institutional investors do say that it is always critical to have cash on hand to be ready to pounce amid depressed equity valuations.

"We are in unique times and we know cash will lose its purchasing power because of inflation, but because the front-end of the yield curve and ultra-shorts bonds have not been immune from volatility, cash gets more attention," Loewengart said. 

"They still have confidence in the economy, just not in the market in the short-term and they are preparing for future rotations, even additional corrections down the road," he said.

Inflation bets, but not defensive bets

The survey's questioning on sector bets within the S&P 500 shows that inflation is dominating over any valuation analysis of stocks right now. Energy, real estate and utilities are the most popular sectors for this quarter, and some traditional defensives not as closely tied to inflation, such as health care and financials, have not fared as well as one might expect.

"Concerns about inflation are overpowering everything else including typical approaches to defensive positioning within equities," Loewengart said. "That is why there is a high level of interest in energy, real estate and utilities but not in financials. But he added, "It is not surprising to see all the interest in sectors that stand to benefit from elevated prolonged inflation."

Even after the heavy losses for tech stocks this year. the percentage of these investors who expressed a high level of interest in tech was lower quarter-over-quarter. The percentage of investors citing tech as their top bet for the quarter declined from 37% to 34%. On Wednesday, a day after the Nasdaq Composite posted a new low for the year, the tech-heavy index began trading over 1% higher as technology stocks rallied led by Microsoft's strong earnings results, but trading was volatile. Microsoft was down roughly 18% this year headed into trading on Wednesday.

Among non-traditional investments, commodities are receiving a high level of interest among these investors, "a big jump and a meaningful increase," Loewengart said. The percentage of millionaires who said they were increasing their investment in commodities doubled from 11% to 22%.

This does worry him as part of a portfolio planning process that could see its long-term lens lose out to short-term inflation worries. "When we see that the bright spots are commodities and energy stocks, that's tough to point out to conservative investors because we don't think they should necessarily be holding commodities as risk-averse investors. Having a meaningful position in commodities could cause problems down the road," he said.  

"Hopefully, some of the inflationary scare is a bit overdone, and clients with a balanced portfolio will be able to return to their traditional posture, and portions of the portfolio moving in opposite directions," Loewengart added.

But for risk-averse investors coping with losses in both stocks and bond portfolios right now, the survey sends the message from investors that there are few places to hide.