Our latest sentiment survey was open from 5/7/10 to 5/13/10. The response rate was well ahead any of our sentiment surveys so far – 175 responses. Your input is for a good cause! If you believe, as we do, that markets are driven by supply and demand, client behavior is important. We’re not asking what you think of the market—since most of our blog readers are financial advisors, we’re asking instead about the behavior of your clients. Then we’re aggregating responses exclusively for our readership. Your privacy will not be compromised in any way.
After the first 30 or so responses, the established pattern was simply magnified, so we are comfortable about the statistical validity of our sample. Most of the responses were from the U.S., but we also had multiple advisors respond from at least two other countries. Let’s get down to an analysis of the data! Note: You can click on any of the charts to enlarge them.
Question 1. Based on their behavior, are your clients currently more afraid of: a) getting caught in a stock market downdraft, or b) missing a stock market upturn?
Chart 1: Greatest Fear. 84.0% of clients were fearful of a downturn, up significantly from last survey’s 69.3%. Only 16.0% were afraid of missing an upturn, also much lower than last survey’s 30.7%. As you can see in the chart, client fear rocketed higher as volatility returned to the market in a big way.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. That spread has soared to 68% from 39% last survey. Clients are extremely nervous at this point, as Chart 2 illustrates. Chart 2 is constructed by subtracting the percentage of respondents reporting clients fearful of missing an upturn from the clients reported as fearful of a market downdraft.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. The average risk appetite this week was 2.55, another noticeable move lower from last survey’s average risk appetite of 2.85. The volatility of the last two weeks has made a significant dent in most clients’ willingness to take on risk in the market. This question is designed to validate the first question, but also to gain more precision and insight about the reported risk appetite of clients.
Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. Right now the bell curve is biased to the low-risk side, even more so than the last four sentiment surveys.
Chart 5: Risk Appetite Bell Curve by Group. The next three charts use cross-sectional data. This chart plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups. We would expect that the fear of downdraft group would have a lower risk appetite than the fear of missing upturn group and that is what we see here.
Chart 6: Average Risk Appetite by Group. A plot of the average risk appetite score by group is shown in this chart. The fear of missing downdraft group had an average risk appetite of 2.40, while the fear of missing upturn group had an average risk appetite of 3.35. Theoretically, this is what we would expect to see. Both groups’ risk tolerance fell significantly from the last survey two weeks ago.
Chart 7: Risk Appetite Spread. This is a spread chart constructed from the data in Chart 6, where the average risk appetite of the downdraft group is subtracted from the average risk appetite of the missing upturn group. The spread is currently 1.11, a modest move higher from the last survey, and an extreme jump from the .62 spread low from six weeks ago.
The volatility from the last three weeks or so has been great for our Sentiment Survey results. The dramatic changes we witnessed in the last few weeks in client sentiment have moved exactly as they should have. With more volatility and fear in the market, we’re seeing clients becoming more risk-averse, and generally more concerned with losing money rather than losing opportunity. A rigorously tested, systematic investment process provides a great deal of comfort for clients during these types of fearful, highly uncertain market environments. Good luck and thank you for participating!
Posted by JP Lee 
