Our latest sentiment survey was open from 12/2/11 to 12/9/11. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 47 advisors participate in the survey (holiday week = light traffic). 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 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 rose around +2.4%. The overall fear number fell from 93% to 91%, off their recent highs. On the flip side, the opportunity group rose from 7% to 9%. Client sentiment seems like it will remain stuck in the mud for the remainder of the year.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread fell this round, from 87% to 83%.
Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. Overall risk numbers snapped back this round, from 2.08 to 2.40. We saw a much sharper move in this indicator to add risk, compared with the overall fear numbers.
Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. Over 90% of all respondents were either 3 or below. We are seeing very low appetite for risk across the board.
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 bar chart sorts out as we expect, with the fear group looking for low risk and the opportunity group looking for more risk. Keep in mind that with the light holiday response, there were only 4 total respondents in the upturn category (again).
Chart 6: Average Risk Appetite by Group. Both groups’ risk appetite rose this round by a significant margin. The upturn group, in particular, hit all-time highs, but keep in mind there were only 4 respondents in that group.
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 jumped to all-time highs this round, due to the upturn’s group move higher.
This survey, we saw a respectable market rally over two weeks, and most of our indicators responded as they should have. The greatest fear number dipped by a small margin, while the overall risk appetite numbers jumped by a large margin. We have had anemic response rates during the holiday, which is to be expected. Hopefully things will pick up when the new year arrives.
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.
Posted by JP Lee 
