Our latest sentiment survey was open from 4/13/12 to 4/20/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 40 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 fell -2.7%, and the greatest fear levels snapped higher. The fear of a downdraft group rose from 74% to 90%, the highest levels we’ve seen all year. The missed opportunity group fell from 26% to 10%. Client sentiment is back in the doghouse.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread shot higher this round from 47% to 80%. We’re a long way from par again!
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 has fallen for two straight surveys in a row. This round the overall average fell from 2.85 to 2.7, dropping with the market.
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. However, there has been a noticeable shift towards less risk, with both 1 and 2 gaining ground.
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 mostly as expected, with the upturn group wanting more risk than the downturn group. However, there were so few respondents in the opporunity camp, that the distribution is slightly skewed from normal.
Chart 6: Average Risk Appetite by Group. This round, the downturn group’s appetite rose slightly, and the upturn group’s appetite fell by a large degree. Keep in mind the overall average fell with the 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 swung lower this round.
From survey to survey, the market took a sizeable hit, and our client sentiment indicators responded like they should. The greatest fear numbers rose to its highest level we’ve seen so far this year. The overall risk appetite fell for the second straight survey round in a row. When taking into account our client survey and the continued outflows from equities, it’s obvious that clients are not ready to jump back into the stock market. Keep in mind the market is still up more than 20% from its Fall 2011 lows.
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.
