Our latest sentiment survey was open from 5/25/12 to 6/1/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! We will announce the winner early next week. This round, we had 66 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 -2.6%, and the greatest fear numbers did not perform as expected. The fear of downturn group decreased from 85% to 80%, while fear of a missed opportunity rose from 15% to 20%. 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 decreased from 71% to 61%.
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 2.55 to 2.48. This indicator continues to fall in line 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. We are still seeing a low amount of risk, with most clients wanting a risk appetite of 2 or 3.
Chart 5: Risk appetite Bell Curve by Group. The next three charts use cross-sectional data. The chat plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups. This chart performs as expected, with the upturn group wanting more risk than the downturn group.
Chart 6: Average Risk Appetite by Group. The average risk appetite of those who fear a downturn decreased with a market. However, the average risk appetite of those who fear missing an upturn increased.
Chart 7: Risk Appetite Spread. This is a 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 increased this round, but is still within its normal range.
The S&P 500 fell by -2.6% from survey to survey, and most of our indicators responded accordingly. Average risk appetite fell, but the fear of downturn group decreased. However, we’d expect the fear of downturn group to increase as the market does poorly, which didn’t happen this round.
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.