Our latest sentiment survey was open from 9/28/12 to 10/5/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 45 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 fell around -1.5%, and some of our indicators responded as expected. The fear of downdraft group rose from 81% to 86%, while the upturn group fell from 19% to 14%. This is what we’d expect to see in a falling market.
Chart 2: Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread continued to rise, from 61% to 73%.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Average risk crept higher as the market fell, which is not typical. However, you can see that the overall trend remained positive over the summer as the market moved higher. Average risk appetite fell from 2.89 to 2.81.
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 50% of all respondents requested a risk appetite of 3. There were no 5′s.
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 rose this week despite a falling market.
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 is now back in its normal range.
The S&P 500 fell around -1.5% from survey to survey, and our indicators held a mixed bag this round. The greatest fear number rose, which we’d expect. On the other hand, we saw the overall risk appetite number tick slightly higher.
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.
