Our latest sentiment survey was open from 1/20/12 to 1/27/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 43 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 +2.9%, and the overall fear numbers nudged slightly lower. The fear of downdraft group fell from 83% to 81%, while the upturn group rose from 17% to 19%. We’re still stuck in overwhelmingly negative territory.
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 65% to 63%.
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 number managed to reach the highest levels we’ve seen since May of 2011. The overall risk number rose from 2.57 to 2.70.
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 curvethis round is heavily concentrated in 3’s and 2’s, a much more lukewarm response than we’ve seen recently. We have been used to seeing heavy concentration in the 1’s and 2’s, so this is a positive shift in client sentiment.
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 chart sorts out as expected, with the upturn group wanting more risk than the downturn group.
Chart 6: Average Risk Appetite by Group. Both groups’ risk appetite pushed higher this round with a rising market. Here we see the upturn group’s risk appetite actual fall in the face of a rising market, while the downturn group’s average moves to recent highs. This is not what we would expect to see (both should rise in a rising market).
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 continues its recent trend of whipsawing.
This survey round, we saw the market rise a respectable +2.9% over two weeks, and most of our indicators respond as they should. The greatest fear numbers ticked lower, and the overall risk appetite average rose to recent highs. Clients seem to be wanting to dip their toes back into the water (risk), but it’s going to take a bigger market rally than what we’ve seen in the last few weeks before clients are ready to pile on the 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.