Our latest sentiment survey was open from 9/23/11 to 9/30/11. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 87 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 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. From survey to survey, the S&P fell around -1.5%, and client fear levels nudged only slightly higher after a major move last round. This round, client fear levels rose from 91% to 92%, while the opportunity group fell from 9% to 8%. Client sentiment remains in the pits as the stock market continues to suffer the effects from an overall dreadful summer.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread rose from 82% to 84% this round.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Overall risk appetite numbers fell by a large margin this round, from 2.28 to 2.10. These overall risk appetite numbers are the lowest we’ve seen since September of 2010. All in all, it’s been a rough few weeks for client sentiment for both of our major indicators.
Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. With overall risk appetite in the gutter, it’s no wonder that we see the majority of respondents (around 70% of all respondents) looking for either 1 or 2.
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 bar chart sorts out as we expect, with the fear group looking for low risk and the opportunity group looking for more risk.
Chart 6: Average Risk Appetite by Group. Both camps’ risk appetite fell this round, and dramatically so. The fear camp’s risk appetite is at the lowest we’ve seen since August of 2010. The more volatile opportunity group’s average dropped dramatically, after a contrarian move up last survey.
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 fell this round after hitting all-time highs last survey.
This survey, we saw the overall fear number tick higher in the face of a falling market. The overall risk appetite number is now sitting at 1-year lows after a horrible summer for the stock market. The stock market is now down 20% from recent highs, client sentiment is near 1-year lows, and the overall risk appetite numbers are terrible. The only silver lining to this situation is that historically, clients have been terrible predictors of future stock market performance. So when we see client sentiment at these levels, it could mean a rally is around the corner (we hope!).
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.
