A special report by Colin Cieszynski, CFA, CMT, Chief Market Strategist, CMC Markets In time for the start of the Lunar New Year, Colin Cieszynski reviews how markets around the world behaved as the year of the Horse came to an end and looks ahead to 2016, the year of the Goat. Within this Special Report Colin Cieszynski, looks at three 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 Horse and the year of the Goat • The outlook for commodities and key stock markets as during the year of Goat • The role central banks around the world are playing in spurring growth Chinese Years and Market Returns Gong Hei Fat Choy! 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. Another year of the Horse has just ended. Historically, these years have seen below average performance for many of the world’s major stock markets. This time around, however, the key stock markets performed better than average, while the commodity market performance was much worse due to the oil price crash at the end of the year. The year of the Goat is now approaching. Historically these have seen very strong performance in the Hang Seng, FTSE, S&P/ASX and S&P/TSX, but only average for the S&P 500 and seen above average for commodities. Average Return S&P 500 Hang CCI FTSE S&P/ASX S&P/TSX Year Seng Sign Since 1927 1965 1958 1963 1959 1927 Dragon 10.28% 12.53% 3.24% 5.32% 7.41% 8.22% Snake (2.36%) (14.81%)(6.90%) 5.25% 3.40% (2.92%) Horse 3.35% 8.30% 4.31% (7.80%) (0.84%) 4.22% Goat 7.71% 34.94% 6.32% 22.69% 32.76% 12.08% Monkey 5.72% 43.92% 1.87% 19.77% 15.27% 5.20% Rooster 12.24% 36.16% 4.78% 10.82% 13.68% 16.49% Dog 6.03% (2.86%) (0.19%) 1.91% (2.17%) 3.29% Pig 14.75% 36.48% 10.07% 22.89% 21.39% 10.35% Rat 6.29% 47.94% (2.30%) 0.69% (4.19%) 6.79% Ox 5.64% (2.05%) 14.72% 8.89% 13.94% 7.34% Tiger 13.96% 4.63% 1.80% 5.45% 4.41% 10.26% Rabbit 8.77% 34.25% 2.69% 19.15% 5.94% 4.52% Average 7.56% 19.02% 3.34% 9.08% 8.66% 6.76% 2015 Horse 11.90% 11.22% (16.70%) 3.58% 6.54% 7.15% Source: CMC Markets, Bloomberg LP How was the recent Horse year relative to others? World stock markets had their ups and downs during the most recent horse year but on balance, turned in a pretty solid performance relative to other horse years. The S&P 500 and Hang Seng posted gains of over 10%, well above average. The FTSE and S&P/ASX posted moderate gains which were better than their longer-term negative average for horse years. Commodities had a particularly rough year though, losing an average of 15% as the price of oil crashed in the second half of the year and finished near its 52-week low. This fall also dragged down energy stocks which caused the S&P/TSX to underperform its US peers and also its long-term average for typical horse years. Year of The Horse (Ending January 31) Solar S&P Hang FTSE Austrla S&P/TSX Year 500 Seng CCI All Shr All Ord Composite 1931 (28.96%) (31.34%) 1943 17.97% 17.78% 1955 40.45% 38.24% 1967 (6.75%) (5.88%) (4.38%) (10.55%)1.90% (8.10%) 1979 11.97% 31.95% 16.79% 10.18% 22.33% 35.76% 1991 4.51% 17.88% (6.87%) (11.22%)(21.19%)(11.65%) 2003 (24.29%)(13.68%)32.69% (31.00%)(13.76%)(14.11%) 2015 11.90% 11.22% (16.70%) 3.58% 6.54% 7.15% Average 3.35% 8.30% 4.31% (7.80%) (0.84%) 4.22% Avg Ex 1931 7.97% 8.30% 4.31% (7.80%) (0.84%) 9.30% Source: CMC Markets, Bloomberg LP Goat years have historically been very strong for stocks On average, goat years since 1943 have been very good for stock markets with major world indices posting gains of between 15% and 35% with the Hang Seng near the top of that range. Goat years have typically not been as strong for commodities though (CCI) which have declined in half of the last four goat years. Year Of The Goat (Ending January 31) Solar S&P Hang FTSE Austrla S&P/TSX Year 500 Seng CCI All Shr All Ord Composite 1932 (50.96%) (39.42%) 1944 13.51% 12.13% 1956 19.63% 19.08% 1968 6.50% (15.36%)(2.24%) 34.76% 43.78% 3.58% 1980 14.24% 69.69% 23.18% 10.52% 52.60% 49.60% 1992 18.86% 41.87% (1.35%) 18.49% 22.79% 9.87% 2004 32.19% 43.54% 5.68% 26.99% 11.86% 29.72% 2016 Avg 7.71% 34.94% 6.32% 22.69% 32.76% 12.08% Avg 17.49% 34.94% 6.32% 22.69% 32.76% 20.66% Ex 1932 Can market bulls really get the bears’ goat this year? Two major factors have aligned to suggest that this goat year could be another strong one for stock markets. First, central banks around the world have been piling on the monetary easing bandwagon lately through interest rate cuts, currency peg removals, negative interest rates, asset purchase programs to increase money supply (QE) and other measures. Perhaps most importantly for this analysis, the People’s Bank of China has joined this parade using its favourite tool, cutting bank reserve requirements. This suggests that even though China’s GDP growth rate has been slowing, the government is not prepared to allow it to slow too much. Second, the crash in oil prices over the last six months that has seen WTI fall from over $100.00 to under $50.00 is one of the biggest drops seen in a generation. The table below shows that after the initial shock and a period of adjustment, oil price crashes have historically been very positive for stock markets by putting more money directly back into the hands of consumers and businesses. Stock returns after big oil declines WTI Dow Return After 3 Month Oil Trigger Month Move 1M 3M 6M 12M Selloffs Jan '86 (38.02%) 8.85% 13.57% 13.06% 37.45% Jan '91 (38.86%) 5.34% 5.52% 10.53% 17.80% Dec '98 (25.34%) 1.93% 6.59% 19.49% 25.23% Nov '01 (28.53%) 1.73% 2.59% 0.75% (9.69%) Apr '03 (23.01%) 4.36% 8.88% 15.58% 20.58% Oct '08 (45.35%) (5.32%) (14.21%)(12.41%)4.15% Nov '14 (31.07%) (0.03%) Average 2.81% 3.82% 7.83% 15.92% Source: CMC Markets, Bloomberg L.P. Even though production growth in some countries may slow, and lower energy prices may boost economic activity in big importing areas like China, Japan and the Eurozone, oil prices may remain low through the year. Further declines and a retest of the 2008 low near $35.00 remains possible. The CCI commodity index has alternated positive and negative returns in the last four goat years and the last one was positive. It does appear that this pattern may continue with another potentially negative year for commodities this time around.