With the end of the Lunar New Year around the corner, Colin Cieszynski reviews the 12-Year Chinese astronomical calendar. Within the report Colin looks at: • How stock markets acted during the ending Year of the Snake • What Horse years have done to markets in the past • The market prospects ahead of the Year of the Horse Chinese years and market returns Another year of the Snake is about to wrap up. Snake years have historically been very weak for the S&P 500, Hang Seng and commodities while positive but below average for the FTSE and S&P/ASX markets. The performance of this Snake year relative to its predecessors has been mixed. The biggest surprise was the spectacular performance by the S&P 500 which was fuelled by inflows of money from the Fed’s QE3 program. Positive sentiment toward stocks during the year also helped the FTSE and S&P/ASX to turn in better than average performances. On the other hand, the Hang Seng declined this year, but not as much as in previous years. Commodities were the most snake-bit market, losing over 10% and underperforming even a low historical hurdle. Average Return
Year SignS&P 500 Average ReturnHang Seng ReturnCCI ReturnFTSE ReturnS&P / ASX Return
Since 1927 1965 1958 1963 1959
Dragon 10.28% 12.53% 3.24% 5.32% 7.41%
Snake (1.80%) (14.08%) (7.03%) 6.21% 3.40%
Horse2.13%7.57%9.56%(10.65%)(2.68%)
Goat 7.71% 34.94% 6.32% 22.69% 32.76%
Monkey 5.72% 43.92% 1.87% 19.77% 15.27%
Rooster 12.24% 36.16% 4.78% 10.82% 13.68%
Dog 6.03% (2.86%) (0.19%) 1.91% (2.17%)
Pig 14.75% 36.48% 10.07% 22.89% 21.39%
Rat 6.29% 47.94% (2.30%) 0.69% (4.19%)
Ox 5.64% (2.05%) 14.72% 8.89% 13.94%
Tiger 13.96% 4.63% 1.80% 33.64% 4.41%
Rabbit 8.77% 34.25% 2.69% 7.19% 5.94%
Average7.64%19.95%3.79%10.78%9.10%
2014 Snake* (up to January 15th)23.36%(3.49%)(10.17%)11.20%7.02%
Source: CMC Markets, Bloomberg LP Looking ahead to the year of the Horse, it’s possible that market performance could be quite different this year. Historically Horse year performance has reversed the performance of the previous Snake year. Markets that have fallen on average during Snake years like the S&P 500, Hang Seng and commodities have rebounded on average during the following Horse year. On the other hand the FTSE and S&P/ASX which have generated positive Snake year returns on average have then fallen back in the following Horse year. What has the Horse done to markets in the past? A closer look at market action in recent Horse years gives us a mixed picture. In Horse years, the S&P rose only four of seven times, the Hang Seng, commodities and the S&P/ASX were 50-50 in terms of gaining in the last four Horse years while the FTSE has declined three of the last four Horse years. Horse years may deliver mixed performance on direction but what is clear is that whichever way they go, Horse years tend to deliver big moves. The S&P 500 has moved more than 10% in five of the last seven Horse years the FTSE has moved more than 10% in all of the last four Horse years while the Hang Seng, S&P/ASX and commodities have moved more than 10% in three of the last four Horse years. Year of the Horse (Ending January 31)
Solar YearS&P 500Hang SengCCIFTSE All ShareAustralia All Ord
1931 (28.9%)
1943 17.97%
1955 40.45%
1967 (6.75%) (5.88%) (4.38%) (10.55%) 1.90%
1979 11.97% 31.95% 16.79% 10.18% 22.33%
1991 4.51% 17.88% (6.87%) (11.22%) (21 19%)
2003 (24.29%) (13.68%) 32.69% (31.00%) (13.76%)
Source: CMC Markets, Bloomberg LP Horse years can be volatile for US markets A look at the volatility of returns for markets across the astronomical cycle shows that horse years are particularly volatile for US dominated markets. Horse years are the fourth most volatile year of the cycle for the S&P 500 and commodities. Average Volatility
Year SignS&P 500 VolatilityHang Send VolatilityCCI VolatilityFTSE VolatilityS&P / ASX Volatility
Since 1927 1965 1958 1963 1959
Dragon 17.03% 10.22% 5.29% 6.96% 10.15%
Snake 13.25% 10.57% 6.23% 12.95% 5.61%
Horse22.57%18.26%16.21%14.56%16.67%
Goat 25.03% 31.06% 10.21% 9.08% 16.21%
Monkey 8.55% 30.78% 5 07% 11.92% 13.79%
Rooster 25.82% 40.99% 14.24% 17.41% 25.01%
Dog 17.59% 33.98% 5.94% 14.17% 16.51%
Pig 21.63% 15.97% 9.65% 19.26% 19.45%
Rat 20.15% 88.75% 18.73% 20.28% 21.21%
Ox 23.16% 41.86% 24.83% 21.49% 20.70%
Tiger 17.76% 36.73% 20.56% 57.86% 21.89%
Rabbit 11.65% 44.85% 7.07% 42.54% 17.19%
Average18.68%33.67%12.00%20.71%17.03%
Source: CMC Markets, Bloomberg LP What does this mean for markets this year? Horse years have been a year of reversal on average and a year with the potential for large moves historically. This suggests that markets that had big rallies last year, particularly the S&P but also the FTSE and S&P/ASX appear vulnerable to a correction in the coming year, potentially a large stumble. If we were to see a big mid-year stumble, they could recover enough by year end to post a small gain on the full year. The Hang Seng and commodities, which retreated during the ending Snake year could see a moderate rebound in the upcoming Horse year. But things are going so well for stocks, what could possibly go wrong? Much of the gains for stock markets in the last year have been driven by the Fed’s QE3 program. It’s easier for hot new money coming into the financial system to be put to work in the markets than loaned to businesses and consumers. For this reason ECB President Draghi indicated he would not pursue any new money programs unless it can be shown they will benefit the economy rather than subsidize banks. QE programs have been shown to artificially inflate stock and commodity prices. The end of the last two US QE programs were followed by a 10%+ selloff in world stock markets within three months. The winding down of QE3, also known as tapering, could create a similar headwind this year leaving stocks vulnerable to being trampled in the upcoming Year of the Horse. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. Please remember any information relating to past performance does not necessarily guarantee future performance.