Our latest sentiment survey was open from 10/21/11 to 10/28/11. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 77 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 rose around +7%, and client fear levels remained almost exactly the same (87% for the fear group and 13% for the opportunity group). Normally we would expect to see a significant drop in client fear levels, but that didn’t happen this week. Clients, on the whole, are wary of the stock market.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. As with the overall fear numbers, the spread remained stable at 74%.
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 continued to rise this round, up to 2.42 from 2.32. The overall risk appetite numbers have risen over the last few weeks, in line with the overall stock market.
Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. Over 80% of all respondents were looking for a risk appetite of either 2 or 3.
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 rose this round with the market, for the second straight 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 nudged higher this round.
This survey, we saw a huge market rally, and a muted move in client sentiment. The overall fear numbers actually stayed the same when rounded to the nearest whole number. Perhaps clients are looking for a more consistent rally than what we’ve seen so far before client sentiment turns around. As of the writing of this report, it turns out that clients may have been right to stay on the sidelines to wait for a little bit more confirmation. Once again, the overall risk appetite numbers remain the most faithful to what we understand client sentiment to be. As the market rises, clients want more risk, and as the market falls, clients want less risk.
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.
