In time for the start of the Lunar New Year, Colin Cieszynski reviews how markets around the world reacted as the Year of the Monkey came to a close, and considers how the upcoming year of the Rooster is likely to bode well for the trader.
Within this Special Report Colin Cieszynski, looks at four key areas and outlines what this could mean for stock markets around the world in the year ahead. This report focuses on:
• Historic market returns for the Year of the Monkey and the year of the Rooster
• How Monkey years are generally supportive for equities and commodities
• The outlook for markets this year, and why the Rooster years historically provide an even greater boost to markets
• Why the clash between the Lunar Cycle and Presidential Cycle may hamper the usual benign Rooster Year environment
Chinese Years and Market Returns
The Chinese Lunar Calendar follows a 12 year cycle with each year named for one of the animals in the Chinese Zodiac. Although the actual New Year date varies, we use January 31st for market analysis purposes. This year, Lunar New Year is on Saturday, January 28th.
A Year of the Monkey is winding down. After getting hammered toward the end of the previous year of the Goat (the worst Goat year in 50 years), global stock markets bottomed out just after the start of the current Monkey year last February. Monkey years have been generally positive for stocks and commodities with markets in Hong Kong, London and Sydney doing particularly well and North American indices near their long-term 8% average return.
Source: CMC Markets
How was the recent Monkey year relative to others?
Stock markets spent this past Monkey year rebounding from a major low and then staged another rally after the US election unleashed a lot of pent up demand for stocks.
A major bear market in crude oil also bottomed out just after the last Lunar New Year. Crude oil doubled off its bottom this year powering commodity indices to strong gains even though gold and copper had mixed years.
Because of this, market performance this year has been very strong with all of the markets we follow for this report posting 10%+ gains. The UK, US, Canada, Australia and commodities all posted gains way above the average for Monkey years. The one disappointment was Hong Kong which returned gains in line with other major indices despite being held back by a struggling Chinese economy, but this was way short of a very high bar as previous Monkey years had been spectacular for the Hang Seng
Source: CMC Markets
Rooster years have historically been good for stocks, but volatile
The long-term average returns for Rooster years have generally been very positive with stock markets around the world gaining well in excess of 10% in Rooster years, way above their 8% long-term average return.
That being said, a more in-depth analysis shows that Rooster years can really go either way. The US S&P 500, for example has gone up in four of the last seven Rooster years. The S&P/TSX has had similar success but in addition the Canadian market has moved over 10% in either direction in the last seven Rooster years.
The Hang Seng, FTSE, S&P/ASX and commodities have all staged significant swings
in both directions as well.
Source: CMC Markets
The Lunar Cycle Vs Presidential Cycle
This year, we could see the Chinese Lunar cycle clash with the US Presidential cycle. In the US, presidents tend to make their biggest and most unpopular moves at the start of the term hoping people will forget by the time they or their party will forget by the next election. Because of this, US markets tend to underperform and can decline in Years 1 and 2 of a presidential cycle and tend to do better in Years 3 and 4 when they are trying to get re-elected.
The big Monkey year gains coincided with a Presidential Year 4, when stronger markets were expected. Rooster years coincide with Year 1 of the Presidential cycle which may explain the higher volatility and huge divergences in returns.
The last two times a Rooster year coincided with the first year of a new Republican presidency were 1969-70 (Nixon) and 1981-82 (Reagan) both of which were years where stock markets fell sharply in the US and Canada. Hong Kong was mixed posting a huge year for Nixon and a big drop for Reagan.
The last two times a Rooster year coincided with the start of a second Republican term results were mixed, dropping in 1957-58 (Eisenhower) but rising in 2005-06 (G.W. Bush)
Stock markets in the US have rallied strongly into the end of the current Monkey year along with the US Dollar. Upward momentum appears to be fading and the risk of a correction growing as the new Rooster year approaches. The positive impact of President Trump’s policies like tax cuts and infrastructure spending may not be felt for a year or more while the negative impact of the higher US Dollar on US exports and the earnings of overseas operations may arrive sooner. The risk of a trade war can’t be ruled out either. It's one thing to go after Mexico but if he goes after China there could potentially be more pushback and potentially bigger repercussions.
Could the 2017-18 Rooster wake up China sensitive markets?
Even though the gains in the Hang Seng were similar to other major stock markets, the results appear disappointing relative to previous Monkey Years and also seem light considering that the 19.6% decline in the previous Goat year left Chinese markets extremely depressed when this year started.
Recent economic figures out of China have been more encouraging with retail sales, industrial production, trade and producer prices on the rise indicating the potential for an economic recovery in the coming year. Speculation that Chinese demand for resources has sparked rebounds in some commodity markets, particularly copper. Should China rebound this year, it could have a positive impact not only on domestic markets but also commodities plus the shares and currencies of resource exporting countries like Australia, New Zealand and Canada.