Our latest sentiment survey was open from 5/11/12 to 5/18/12. 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 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 fell -3.5%, and client sentiment worsened as expected. The fear of downturn group rose from 80% to 85%, while the fear of a missed opportunity group fell from 20% to 15%. Client sentiment remains poor overall.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread ticked higher this round, from 60% to 71%.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Once again, the average risk appetite performed as expected, falling from 2.77 to 2.55. Technically speaking, this indicator has broken through solid support on the downside.
Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. We’ve seen a dramatic shift to less risk over the last few surveys. right now, the majority of clients want either a risk appetite of 2 or 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 mostly as expected, with the upturn group wanting more risk than the downturn group.
Chart 6: Average Risk Appetite by Group. This round, both groups’ risk appetite 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 spread fellthis round and is sitting pretty in its normal range.
The S&P 500 fell by -3.5% from survey to survey, and all of our indicators responded in-kind. The fear of a downturn group rose, and overall risk appetite fell. We’d expect to see both of those occuring when client sentiment is worsening.
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.
Posted by JP Lee 
