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 fell -1.7%, but client fear levels managed to inch lower. Usually on any down move, we’ll see an uptick in client fear. It seems like the rally from two surveys ago (+5%) has left most clients with enough positivity to push fear levels lower.

Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. Like the overall fear numbers, the spread nudged lower this round from 63% to 56%.

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

Chart 3: Average Risk Appetite. Unlike the overall fear numbers, the average risk appetite fell in-line with the market, from 2.68 to 2.42. If I had to pick just one indicator to gauge client sentiment real-time, it would have to be the overall average risk appetite number. For some reason, the overall number seems to follow our expectations nearly every survey. Following an up move, average risk goes up, and vice versa.

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, but still in command. 2′s were the most common response this around (49%), trailed by 3′s (37%).

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. Note there are zero responses with a risk appetite of 5.

Chart 6: Average Risk Appetite by Group. A typical result this week (and the exact opposite of last week): investors fearful of a downturn had a lower risk appetite, while investors fearing missing an upturn increased their risk appetite. The opportunity investors seem ready to add risk despite a minor pullback.

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 shot right back up on the market downswing, after falling last round.

This survey round presents a few anomalies. First, the overall fear numbers did the opposite of what we would expect in a falling market. We saw a continued drop in fear levels, despite a market pullback. I’d guess that move could be explained as a follow-through from the survey before, when we saw fear levels plummet on a +5% market move. On the other hand, we saw average risk appetite move in-line with the market, falling as the market dropped. The overall average risk appetite numbers continue to perform the most consistently through the week-to-week market noise.

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.