Our latest sentiment survey was open from 11/18/11 to 11/25/11. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 61 advisors participate in the survey (holiday week = light traffic). 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 -3.0%, and client fear levels responded in-kind. The overall fear number rose from 88% to 93%; the greatest fear numbers are now the highest we’ve seen since mid-June. On the flip side, the opportunity group fell from 12% to 7%. Client sentiment remains terrible.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread jumped this round, from 77% to 87%.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Overall risk numbers plummeted this round, from 2.44 to 2.08. Overall risk appetite is now the lowest we’ve seen since September of 2010.
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 50% of all respondents want a risk appetite of 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. Keep in mind that with the light holiday response, there were only 4 total respondents in the upturn category.
Chart 6: Average Risk Appetite by Group. Both groups’ risk appetite fell, just like the overall risk number.
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 jumped by a small degree this round.
This survey, we saw the market dip lower, and both client fear levels and overall risk appetite respond as expected. The overall risk appetite number paints an ugly picture — client sentiment is now the worst it’s been since September of 2010. While that’s never a good thing, some studies have shown that when client sentiment reaches these types of overextended low levels, the stock market does well going foward.
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.