Our latest sentiment survey was open from 2/17/12 – 2/24/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 52 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 500 rose just over +1%. Despite the moderate rally, client sentiment got worse this survey round, but not by much. Overall client fear levels rose from 67% to 69%, while the missed opportunity group fell from 33% to 31%. Despite a moderate pullback this week, it’s clear that client sentiment has improved significantly in the last three months with the market rally.
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 34% to 38%.
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 rose from 2.80 to 2.93. Once again, I’d argue that the overall risk appetite number provides us with the best snapshot of client sentiment within this survey.
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 continues its recend trend towards more risk. The most common risk appetite requested was 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 chart sorts out as expected, with the upturn group wanting more risk than the downturn group.
Chart 6: Average Risk Appetite by Group. Historically, this is one of the most volatile indicators in the survey. This round, both groups moved higher with the market, which is what we’d expect to see 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 fell slightly this survey round.
For this survey, the market rose just over +1% over two weeks, and the indicator responses were a mixed bag. The overall fear numbers actually grew in the face of a rising market, which is not what we’d expect to see. However, considering how much client sentiment has improved over the last few months, it’s not a stretch to see a slight pullback. The overall risk appetite indicator continues to move higher with the market. If the market rally can continue to gather steam, we should continue to see client sentiment improving into the future.
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.