Our latest sentiment survey was open from 3/2/12 to 3/9/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 48 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 was up by a small margin (+0.5%). Despite the market basically treading water, client fear levels rose by a significant margin from 69% to 83%. On the flip side, the opportunity group fell from 61% to 17%. The S&P experienced a moderate pullback during the survey voting, which probably explains the sudden drop in client sentiment.
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 38% to 67%.
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 fell from 2.93 to 2.79. Just as we saw with the overall fear numbers, client sentiment took a hit over the last 2 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. 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 this round, which is not what we’d expect. Keep in mind that the overall risk appetite number did fall.
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.
From survey to survey, the market was up just a bit. Client fear levels rose higher despite a “rising market.” What the data points fail to point out is that the market experienced a sharp pullback during the week of voting, which accounts for the rise in fear levels. Most of the other indicators followed the greatest fear’s lead, with clients wanting less exposure to risk in a shaky market. Keep in mind that the stock market has been rallying for a few months now, as has client sentiment. It might not hurt to take a little breather, as both client sentiment and the overall market continue to improve.
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.
