Our latest sentiment survey was open from 8/3/12 to 8/10/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! We will announce the winner in two weeks [Ed note: Last round we incorrectly stated the prize date]. This round, we had 38 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. Some statistical uncertainty this round comes from the fact that we only had four 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 two 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 basically flat, but client sentiment improved noticeably. The fear of downturn group fell from 91% to 76%, while the upturn group rose from 9% to 24%. Clients seemed to have settled down towards the end of the summer.
Chart 2: Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread fell from 83% to 51%. We’re still a long way from even though.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Average risk appetite rose this round, from 2.27 to 2.43. This move mirrors the greatest fear indicator.
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 low risk appetites, with most clients having a risk appetite of 2 or 3. We had zero advisers say that their clients were looking for high risk investments (5) this week.
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 sorts out as expected, with the downturn group wanting less risk and the upturn group looking to add risk.
Chart 6: Average Risk Appetite by Group. The average risk appetite of both groups decreased this week, even as the market did well. After two “off” surveys in a row, the fear of upturn group is back in its normal range, while the downturn group’s risk appetite continues to move lower.
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 shot higher this round and is back to its normal range.
The S&P 500 was basically flat from survey to survey, but client sentiment improved markedly. Both the overall fear numbers and the overall risk appetite numbers highlighted a push towards a more balanced risk appetite and fear levels. Could client sentiment be improving as the summer doldrums march on?
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.