Our latest sentiment survey was open from 4/25/11 to 4/29/11. 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 133 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 rallied around +0.5%, not that much. Client fear levels dropped from 76% to 73%, also not that much. On the other side, we see the fear of missed opportunity group rise from 24% to 27%.
Nothing much to say here. We saw the market rally barely, and client fear levels drop by around the same. Once again, it’s great to see the indicators performing as we hypothesized they would.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread also remained fairly stable, dropping from 51% to 46%.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Average risk appetite dropped barely, from 3.07 to 3.01. Last survey’s risk appetite number ranked the highest since we started the survey. Considering the market’s tepid rally from the previous survey, it’s not too surprising to see client risk appetite fall back a little from those levels. Again, we’re seeing our sentiment indicators match the strength of the market moves. Big rally = big sentiment move. Small rally = small sentiment move.
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. We’ve been seeing this bell-curve pattern for a few weeks now, and expect it to continue as long as the market keeps treading water.
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 perfectly, save one person in the missing upturn group who desired a risk appetite of 1. The fear group is looking for lower risk (3′s through 1′s), while the opportunity group is looking for more risk (3′s through 5′s).
Chart 6: Average Risk Appetite by Group. Leave it up to the average risk appetite by group graph to mix it up a bit. We’ve long noticed that this particular chart is one of the most interesting out of the group, in that we see more divergences from our expectations. Here we see the upturn group’s risk appetite jump by a pretty large degree, while the exact opposite happens in the downturn group.
In acting this way, both groups have resorted to their default mode, in that both groups made a big push towards what we would expect their desired risk appetite would be. The upturn group had a big push to more risk, and the downturn group had a big push to less risk.
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 in the last 2 surveys we have seen some relatively large swings in this indicator.
This round, the market rallied around +0.5% from survey to survey, and the overall fear numbers moved by around the same degree (not that much). This is what we would expect, as we’ve noticed that large market moves lead to large fear swings, and smaller market moves lead to muted fear swings. All in all,the survey indicators are performing exactly as expected.
One of my favorite indicators is the overall risk appetite average, which has been one of the most reliable proxies for determining what the clients “really feel” when compared to the overall fear numbers. Having barely pulled back from all-time highs above the 3.0 level, it will be fun to watch this one move in relation to the market going forward.
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.
