Our latest sentiment survey was open from 8/27/10 to 9/3/10. We saw a solid uptick in the response rate, with 159 readers participating. 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. Despite this week’s rally, client fear continues to dominate our broad sentiment index. 94% of clients were fearful of a downdraft, nudging higher from last survey’s 93%. In the previous survey, fear nudged up by the same amount; we remain just off the all-time highs of fear sentiment. The market has staged a respectable bounce over the week the survey was out. It will be interesting to see if the market can hold up, and what, if any, the effect will be on client sentiment.
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 89%, a step higher than last week’s reading of 86%. It seems like the spread is inching higher and higher as the market fumbles around. Eventually this trend will have to pull back, and it’s just a matter of time before that happens.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Average risk appetite has been trading within a fairly steady range since the end of May, pointing to a long-term patten of low-risk tolerance during times of heightened market uncertainty. Right now the average risk appetite for all participants is 2.03, just down from last week’s reading of 2.10. The average risk appetite slow-march towards zero risk is highlighted here.
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. This week we had zero respondents whose clients would be considered a 5, which is “Take Risk.”
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. These readings come exactly into line with what we’ve noticed before. The downturn group’s average risk appetite clocked in at 1.99, while the upturn group’s came in at 2.67. In both instances, the average risk appetite moved lower from last survey to this one. It seems like across the board, all of our sentiment indicators are creeping towards fear and reducing risk. It’s just a question of how low it can go, and how long it will stay there.
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, down from last week’s .85. We see here again that the upturn group has a more volatile risk appetite, while the fearful clients have been staying around an average of 2.0 for nearly the entire summer.
This survey’s responses sync up nicely with our previous data. As the market continues to chop and grind lower, clients edge closer to being fully risk-averse. The market rallied big in the middle of the week to start September, which could lead to some discrepancy in the reading. Most of our respondents came early in the week, so this round really doesn’t incorporate the rally. However, who’s to say that a bounce would get anyone back in the market? In our last two surveys we’ve discussed how much of a rally it’s going to take to get Joe Investor back in the market…it’s likely to take a lot more than a solid bounce that has lasted half a week thus far. Hopefully the market will make a move out of its tight range in the latter half of the year, and we’ll get to see how that move affects our sentiment numbers.
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!
Posted by Andy Hyer 
