Singapore Sales Trader
Summary: Many Chinese people take the symbolism of traditional zodiac signs very seriously indeed. But can there really be any correlation between the attributes of the individual year-signs and stock market performance?
In about a week’s time, Chinese people at home and all around the world will celebrate the Lunar New Year, enjoying time with their families, catching up with friends and exchanging traditional “red envelope” gifts. The Chinese lunar calendar is based on a twelve-year cycle and every year is named after one of 12 animals, namely rat, ox, tiger, rabbit, dragon, snake, horse, sheep, monkey, rooster, dog and pig, and each animal has its own unique character. 2019 is the year of pig in the Chinese zodiac.. It is very common in Asian culture to link zodiac signs with personal behaviour and one’s fortune in a certain year. Although this may be seen as pure superstition, it is also not uncommon to see people trying to link stock market performance with the Chinese zodiac. Understandably, zodiac culture has often affected the way people make decisions. In this article we’ll try to see whether the stock market returns were indeed affected by the zodiac.
We studied the historical performance of Hong Kong’s Hang Seng Index and the S&P500 index in the US.
The Hang Seng Index reflects the performance of major Chinese stocks. When the Hang Seng Index was first introduced internally to Hang Seng Bank staff, its base of 100 points was set equivalent to the 33 component stocks' total value as of the market close on July 31, 1964. The index was only published after November 24,1969. We will study the historical data of Hang Seng Index from 1965 to 2018, which completes more than four full cycles of the Chinese zodiacs.
The graph below shows the year of the pig has been the third-best year for the Hang Seng Index. Past years of the pig have averaged a return of 33.80%, just behind the year of the rat (42.38%) and the year of the rooster (39.23%). The rat years show the highest gains while the snake years display the biggest losses. These findings are consistent with the common belief in Chinese culture where the snake is viewed as a phlegmatic and cold animal.
Our study also uncovered a possible explanation as to why 2018, under the sign of the dog, was such a bad year for traders in the Hong Kong market. The year of the dog has the second-worst performance among all zodiac signs. The findings of this study would have provided advance warning that 2018 would be a tough year for traders who trade the Hong Kong market – the dog did indeed bite. Now that we are waving goodbye to the barking dog, we hope the good-natured pig will give us a year of steadiness and reward with good returns.
Note: Data from 1965 to 2018. Return is calculated based on value on calendar year end, not lunar year.
Out of curiosity, we also performed the same exercise on US markets using the S&P 500 index as the sample. Since 1928, the S&P 500 index has measured the performance in the overall US stock market. The year of the pig historically was the best performing year with an average return of 16.51%, far ahead of the 11.88% gain shown by the first runner up, the year of the rabbit. The result should be more convincing as we have a longer period to study, From 1928 to 2018, that is 90 years and more than seven complete cycles of the Chinese zodiac. Surprisingly, the year of the snake is also the worst performing one in the US market. The snake is ruthless everywhere.
Note: Data from 1965 to 2018. Return is calculated based on value on calendar year-end, not lunar year.
Apart from returns, we also studied the standard deviation to see if there is consistency in the returns on each zodiac year. For the Hang Seng index, the year of the rat gave the best average return but also shows the highest standard deviation which means the returns varied dramatically among the four occurrences of rat years during the period we studied. Looking back in detail, years of the rat were 1972,1984,1996 and mostly recently 2008, a year remembered for the global financial crisis. Coincidentally, the rat is always associated with shrewdness. The same character seems to be reflected in the stock market. For the year of the pig, the standard deviation stands at 21.6% – the middle range among all. Traditionally, the pig is an animal that carries the image of patience and sturdiness. If the same character applies to stock markets, then we can expect the year of 2019 to provide good return with very mild volatility in the Hong Kong market.
For the US market, the variation on averages wasere much smaller. For the year of the pig, standard deviation only stands at 15.6%. If historical performance is a good indication of future trends, then for the year of pig, the US market should give investors very good returns with manageable volatility.
Hong Kong based CITIC securities have been issuing a Feng Shui Index every year around Chinese New Year period to predict the movement of the Hang Seng index in the coming year. The full report for the year of the pig has just came out this week. Interested readers can read the full report here. According to the Feng Shui Index, they foresee the Hang Seng index to act like a “flying pig” which can go everywhere so it is advisable for traders to prepare for the rainy days as “money will go as quickly as it comes”.
Additionally, the Chinese astrology also assigns one of the five elements, namely earth, fire, metal, water and wood, to each year. The element will also have a part to play when it comes to selecting specific sectors to play. 2019 is a year of “earth”, therefore the sector set to benefit are all the “earth industries” such as construction, real estate and basic materials. This coincides with a government effort to increase infrastructure spending and planning for large scale projects. If our readers believe in this element story, now it is the time to check out some of the names in the above-mentioned sectors.
Admittedly, given the small sample size, the study may not render any statistical significance and of course no sensible investor will make serious investment decisions based on astrological evidence. We wish to provide some observations on this interesting topic and most importantly share our confidence in the currently volatile but still promising market.