Our latest sentiment survey was open from 3/25/11 to 4/1/11. The Dorsey, Wright Polo Shirt raffle continues to drive advisor participation — thank you for taking the time! Please remember, the first drawing will be held on June 1, so keep playing to increase your odds of winning. This round, we had 134 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 five 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 rallied by less than 1%, and client fear levels abided slightly. Around 85% of respondents said their clients were afraid of a downdraft, down slightly from last survey’s reading of 86%. On the flip side, we had 14% of clients more afraid of missing out on a rally.
Since bottoming out in March of 2009, the S&P 500 is up well over 90%, yet 85% of clients are more worried about the market going down than of missing a rally. Cognitive disconnect, anyone?
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread fell slightly from 73% to 70%.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Average risk appetite nudged higher along with the market, up to 2.92 from 2.85. The overall risk appetite number has held up much better than the overall fear numbers. You’ll notice that the recent market pullback had a much less pronounced effect on risk appetite than the fear numbers. That disconnect is a great example of why we ask both sets of questions — when using the two separate questions together, we can get a more well-rounded snapshot of client sentiment.
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 saw a big rise in the number of 3′s this round, with nearly 60% of clients responding there. Click here to see last survey’s chart for comparison.
Chart 5: Risk Appetite Bell Curve by Group. The next three charts use cross-sectional data. This chart 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 exactly as we would expect. You can see that upturn group is more sure of itself, with zero respondents at 1 or 2, whereas the downturn group has a number of respondents answering 4.
Chart 6: Average Risk Appetite by Group. Despite a rising market, we saw the upturn group’s risk appetite tick lower this round. Don’t be alarmed though, this group has historically had a much more volatile risk appetite. The fear of downdraft group rose slightly in-line with the market. Notice how both risk appetites have managed to trudge higher for the last 6-8 months in-line with the market.
Chart 7: Risk Appetite Spread. This is a spread 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 one of the less volatile indicators found in the survey, and fell this round.
This round, the market rallied less than 1% from survey to survey, and client fear levels abated slightly. It’s amazing that the broad market is up nearly +100% in two years, but 85% of clients are more afraid of a downturn than missing a rally.
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.
