Our latest sentiment survey was open from 3/30/12 to 4/6/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 53 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 three 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 flat. After hitting all-time lows last round, the greatest fear number rose from 62% to 74%. On the flip side, the missed opportunity group fell from 38% to 26%.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread rose from 24% to 47%.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. In line with the greatest fear numbers, average risk appetite also ticked lower, from 3.02 to 2.85. It’s not too surprising, given the fact that the overall number has been rising steadily all year.
Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. This round, over half of all respodents wanted a risk appetite of 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. This round, the upturn group’s risk appetite rose, while the downturn group’s risk appetite fell. This is what we’d expect to see.
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 spiked higher this round.
From survey to survey, the market was flat, and our indicators moved towards less risk. The overall fear number rose, and overall risk appetite fell. This is not too surprising, considering the greatest fear number hit all-time lows last round, and overall risk appetite was just off all-time highs. With any luck, client sentiment should continue to improve if the market continues to rally.
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.
