Our latest sentiment survey was open from 1/6/12 to 1/13/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 63 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 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 rose by +4.8%, and the overall fear numbers reacted as they should. The fear group fell from 93% to 83%, while the upturn group rose from 7% to 17%.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread fell this round from 85% to 65%. We’ve still got a long way to go until we hit par.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. The overall risk appetite numbers continue to whipsaw for the 4th straight survey in a row. The overall number frose from 2.19 to 2.57, the highest levels we’ve seen since mid-summer.
Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. The bell curve layout has shifted towards more risk, with more than a smattering of 4’s and 5’s this round. If the market can continue to rally, we’ll probably see a continued shift to the right on this chart.
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 groups’ risk appetite pushed higher this round with a rising market. The upturn group has had a very volatile past few surveys, due to light holiday response.
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 snapped back this round after a few whipsaws.
This survey, we saw a respectable market rally nearing +5%, and all of our sentiment indicators respond as they should. The overall fear number pushed lower to sentiment levels we last saw at mid-summer. The overall risk appetite indicator also pushed higher with a rising market, towards mid-summer levels. If the market can keep up this momentum out of the gate into the new year, hopefully we’ll see some strong improvement in overall client sentiment.
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.