Our latest sentiment survey was open from 6/22/12 to 6/29/12. 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 49 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 fairly comfortable about the statistical validity of our sample. Any statistical uncertainty this round comes from the fact that we only had three investors say that thier clients are more afraid of missing a stock upturn than being caught in a downdraft. 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 increased 0.71%. The greatest fear numbers did not perform as expected. The fear of downturn group increased from 86% to 94%, while fear of a missed opportunity decreased from 14% to 6%. Client sentiment remains poor.
Chart 2: Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread increased from 73% to 88%.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Average risk appetite did not perform as expected. It fell slightly from 2.41 to 2.39, even though S&P; 500 rose.
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 having 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. Those who fear a downdraft prefer a low amount of risk, with most clients having a risk appetite of 2 or 3. We only had three responses that indicated a fear of missing an upturn, but even our limited number of responses showed that these people do prefer more risk.
Chart 6: Average Risk Appetite by Group. The average risk appetite of those who fear a downturn increased slightly with the market. The average risk appetite of those who fear missing an upturn also 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 and is at its highest level so far this year.
The S&P; 500 rose by 0.71% from survey to survey, and some of our indicators responded accordingly. Average risk appetite by each group increased, but the total average risk appetite fell. As the market does better, we would expect more people to fear missing an upturn, yet more investors feared a downturn. Overall, client sentiment remains poor.
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.
