Our latest sentiment survey was open from 7/19/10 to 7/23/10. The response rate was higher than last survey’s with 167 participants. 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. 92.8% of clients were fearful of a downdraft, just off the all-time highest levels of fear we saw last survey (94.7%). The market staged a respectable bounce since the last survey, but the move had a miniscule effect on the overall client sentiment. On the flip side, we saw the missed opportunity group tick barely higher to 7.2%, up from last survey’s 5.3%. Bearish sentiment is dominating the market right now, and it will probably take a major move higher to get Joe Investor remotely interested in risking money in the stock market.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread remains significantly skewed towards fear of losing money this round. This survey’s reading was 86%, a hair lower than last week’s reading of 89%. Again, we are seeing fear levels just off the all-time highs that were set 2 weeks ago. 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 from this survey paints a crystal clear picture that mimics the research done by DALBAR. The market topped most recently on April 26, the same week that clients’ risk appetites peaked at 2.85. Since then we’ve seen the average risk tolerance trudge steadily lower with the market. That’s what we see time and again, both anecdotally and statistically – risk appetite moves higher with the market, until EVERYBODY wants maximum risk, and then the market crumbles. On the other side, risk appetite moves lockstep lower with the market until EVERYBODY wants zero risk, and then the market rallies.
Right now we have average risk appetite levels at 2.12, just off the lows of last survey’s 2.05.
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, as it has been for the few months. What we see in the bell curve is more evidence that clients are afraid of losing money in the market. The big news in this chart is the single, solitary 5 we see on the right side. Brave soul or internet troll? You decide!
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.
Although we have a 5 and a few 4’s in this survey round, this graph shows a very pessimistic, bearish market sentiment dominated by fear. The Upturn group mustered up a decent number of 3’s, but the overall sentiment can still be tied directly to the first graph of Greatest Fear.
Chart 6: Average Risk Appetite by Group. A plot of the average risk appetite score by group is shown in this chart. The downdraft group clocked in at 2.1, while the upturn group scored an average of 2.75. Theoretically, this is what we would expect to see, with the fearful clients wanting less risk than clients worried about missing opportunities.
Once again, the upturn group exhibits a more volatile average appetite than the downdraft group, with a 50 basis point swing versus the downdraft group’s 5 basis point move.
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 .67.
Recent market action continues to suppress any type of positive client sentiment. We’ve seen the market stage a significant correction since recent highs in April, and it seems like clients are still holed up in “bunker mode,” willing to jump to safety at the first sign of a downward market move. While it’s important to consider risk management and to keep a watch on your portfolios, it’s unfortunate to see client sentiment jump around so much based solely on the market action over the last two weeks. In particular, the overall greatest fear numbers swing significantly with the market, while the upturn group’s average risk tolerance is downright volatile. Only time will tell whether the market is merely correcting, or changing gears after the superb rebound of 2009.
No one can predict the future, as we all know, so instead of prognosticating, we will sit back and enjoy the ride. A rigorously tested, systematic investment process provides a great deal of comfort for clients during these types of fearful, highly uncertain market environments. Until next time, good trading and thank you for participating!
