Our latest sentiment survey was open from 4/8/11 to 4/15/11. The Dorsey, Wright Polo Shirt raffle continues to drive advisor participation — thank you for taking the time! Please remember, the first drawing will be held on June 1, so keep playing to increase your odds of winning. This round, we had 127 advisors participate in the survey. 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 five 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. From survey to survey, the S&P 500 rallied just over +1%. Client fear levels, however, dropped by a substantial margin, from 85% to 76%. On the flip side, we saw the percentage of clients who were more afraid of missing a rally rise from 15% to 24%.
What’s interesting about this round is the relatively large move in fear levels, when the market only rose slightly. Compare that with last round’s results, where we had a +1% rally in the market, with a corresponding 1% drop in fear levels (compared to this round’s 10% move).
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread also staged a respectable drop, from 70% to 51%.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Average risk appetite hit all-time survey highs this round at 3.07 up from 2.92. That’s pretty big news considering that we have been running the survey for just over a year, and the market is up around 90% since the lows of March 2009. Historically, we’ve noticed that the overall risk appetite number has been one of the more consistent of these indicators. Generally, when the market rises, risk appetite rises too, and vice versa when the market is going down.
Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. The majority of respondents continue to desire a risk appetite of 3, while there are not as many clients at the tail ends of either side of the bell curve.
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. This chart sorts out as exactly as we would expect. We have the majority of respondents as 2′s, 3′s and 4′s, sorted by group. The upturn group is looking to add risk, and the downturn group is searching for moderate to “safe” risk.
Chart 6: Average Risk Appetite by Group. Here we have a nice anomaly just to make things interesting. We already know that overall risk appetite rose to all-time highs, but you can clearly see that the upturn group’s risk appetite actually fell in the face of a rising market! On the other hand, the downturn group ramped up its risk appetite, which no doubt propelled the overall numbers to new highs.
The question is this: does the upturn group’s divergence from the norm signal that we are due for a correction?
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 normally one of the least volatile indicators, but we saw a massive plunge in the spread, due to the downturn group’s rising risk appetite.
This round, the market rallied less than 1% from survey to survey, and client fear levels dropped significantly. Compared with last round’s fear level shift (based on a similar 1% market move), we would consider this a substantial drop in fear levels. Also, combine that with the fact that the overall risk appetite average is sitting at new highs above 3.0 for the first time in survey history, we’d say this is a survey to remember! It’s great to know that clients are keeping things interesting.
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.
