Systematic Relative Strength

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 four 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 was up 5.3%, and client fear levels ticked lower from 94% to 82%. Although fear is still at a relatively high level given how well the market has done over the past year, the recent bounce in the market has caused clients to be a little less worried.

When the market hit fear levels in the mid-90s last summer, the market had a very good following year. We can only hope that history will repeat itself!

Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread dropped dramatically, from 88% to 63% this round.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

Chart 3: Average Risk Appetite. Average risk moved higher from survey to survey, from 2.44 to 2.68. Clients normally respond to recent activity in the market, and since the market was up over 5% since the last survey, the increase in risk appetite is not a big surprise. One positive: clients did not go off the deep end this summer during the correction like they did last summer. Last year, average risk appetite dropped as low as 2.03 during the worst client pessimism. This summer it reached only 2.44.

Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. Fear is slowly moderating. The central tendency is a risk appetite of 3, but there are still many more 2s (a robust 36%) than 4s (only 12%).

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 also sorts out pretty much as expected, with the fear group wanting less risk and the opportunity group wanting more.

Chart 6: Average Risk Appetite by Group. An interesting result this week: investors fearful of missing an upturn had a lower risk appetite, while investors fearing a downturn increased their risk appetite. Fearful investors seem to have some concern about the market getting away from them on the upside.

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 took a pronounced drop this week, although it’s still in the 0.5 to 1.0 range where it has stayed most of the past couple of years.

Although fear continues to dominate sentiment, we got a tick up in risk appetite this survey for the first time in a number of weeks. It will be interesting to see if clients respond to the news environment around the budget compromise or if they stay primarily responsive to the market as they have in the past.

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.