Client Sentiment Survey Results – 4/26/13

May 7, 2013

Our latest sentiment survey was open from 4/26/13 to 5/3/13.  The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support!  This round, we had 57 advisors (same as last time! thanks!) 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 market was basically flat.  Our indicators were once again a mixed back.  The fear of downdraft group rose from 74% to 79%, while the upturn group fell from 26% to 21%.

Chart 2: Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups.  The spread moved higher again, from 47% to 58%.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

Chart 3: Average Risk Appetite.  Average risk appetite bounced this round, from 2.85 to 3.05.  We’re sitting just off of all-time risk appetite highs.

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 wanted a risk appetite of 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.  We can see the upturn group wants more risk, while the fear of downturn group is looking for less risk.

Chart 6: Average Risk Appetite by Group.  This round, both groups’ risk appetite moved higher in a flat 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 continues to trade within it’s normal range.

From survey to survey, the S&P was basically flat.  Client sentiment improved in some of our indicators, and fell in others.  Once again we see the overall risk appetite average acting as the most consistent indicator.  With client risk appetite near all-time survey highs, and the stock market currently hitting all-time highs, we hope to see those trends remain intact.

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.

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Stock Market Valuation

May 7, 2013

Stock market valuation is always a concern for investors.  Presumably it always helps to buy when valuation is low.  However, I’m no expert on stock market valuation.  In the past, I’ve shown some bottom-up valuations constructed by Morningstar analysts.  They suggest the market is fairly valued right now.  Another way to look at it is top-down; that is, taking the big picture view of valuations.

That’s what Ed Yardeni of Dr. Ed’s Blog does.  From a big picture perspective, there are just two main variables in stock market valuation: earnings, and the multiple you put on those earnings.  Lots of firms estimate aggregate S&P 500 earnings.  (Top-down estimates actually tend to be a little more accurate than bottom-up estimates.)  In this version, he uses the Thomson Reuters IBES estimate.  For his estimate of the appropriate multiple, he uses 20 minus the 10-year yield.  That kind of thinking makes sense.  With low interest rates, the market has typically traded at a higher multiple.  When interest rates or inflation are high, the PE multiple tends to get compressed.  He points out that other versions of this chart, like using a multiple of 20 minus CPI inflation come out in the same ballpark.

Here’s the chart from his recent article on valuation:

Source: Dr. Ed’s Blog    (click on image to enlarge)

It’s an interesting chart, is it not?  Based on earnings, it suggested the market was significantly overvalued in the late 1990s, and then fairly valued from 2002 to 2007 or so.  The market dropped appropriately in response to weak earnings during the financial crisis, but is now about 30% undervalued, not having kept up with the rapid earnings growth we’ve seen since then.  The suggestion is that if earnings hold up, current stock prices are not out of line with the past decade.

It’s well worth reading the rest of the article, as Dr. Yardeni also discusses the relative valuation of stocks versus bonds.  (The whole blog is worth reading!  He is one of the more practically grounded economists out there.)

My takeaway on this is simply that the current market may not warrant the incredible amount of hand-wringing that we’ve seen as the S&P 500 has pushed to new highs.  Given the powerful corporate earnings we’ve seen, coupled with very low interest rates, the market’s valuation may be reasonable.  Yes, it feels scary because we are in new high ground, but the data looks different than we might feel emotionally.

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