Our latest sentiment survey was open from 12/16/11 to 12/23/11. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 54 advisors participate in the survey (holiday week = light traffic, again). 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 -2.0%, and the overall fear number ticked higher as a result. The fear number rose from 91% to 93%, while the opportunity group fell from 9% to 7%.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread rose this round, from 83% to 85%.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Overall risk numbers fell in-line with the market, from 2.40 to 2.19. This indicator has been whipsawing in-line with the market for the last few weeks.
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 95% of all respondents wanted a risk appetite of 3 or below.
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 (again).
Chart 6: Average Risk Appetite by Group. Both groups’ risk appetite fell this round with the market. The upturn group’s average could be considered “skewed” by the small number of responses. Nevertheless, it’s significant to see the upturn group at the lowest levels since June of 2010.
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 from all-time highs last round, to all-time lows this round.
This round, we saw a moderate decline in the market, and all of the sentiment indicators responded as they should. The overall risk appetite number has continued to work perfectly, rising and falling in-line with market action. Hopefully once the new year is underway, we’ll see an uptick in advisor participation.
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.