18 February marks the first day of a new lunar year. According to the Chinese zodiac, this coming year will be the Year of the Pig. It succeeds the Year of the Dog, which has turned out to be a good year for stocks. Will the Year of the Pig provide another feast for stock investors?
Stock markets have started 2007 on a generally positive note. According to the Morgan Stanley Capital International indices, most markets are in positive territory year-to-date.
| Local currency (percent) | US dollars (percent) | |
| USA | 1.8 | 1.8 |
| Japan | 3.7 | 1.6 |
| UK | 2.7 | 2.2 |
| Germany | 4.7 | 3.2 |
| France | 2.7 | 1.2 |
However, emerging markets, after stellar performances in 2006, have done less well so far this year.
| Local currency (percent) | US dollars (percent) | |
| Brazil | -1.0 | 0.6 |
| China | -0.4 | -0.8 |
| India | 5.5 | 5.8 |
| Russia | -4.6 | -4.6 |
Professional feng shui researcher and practitioner Raymond Lo has written an article in which he provides an outlook for the year based on Chinese feng shui principles.
According to Lo, the 2007 Year of the Pig is symbolised by fire sitting on top of water. This is yin fire and symbolises tension, temperamental emotions, agitations, and illusions. It can be compared to a candle flame, a spark of fire that "can burn down the whole plain". He says that the illusion of a good market can generate over-optimism "that will drive up the stock market in the first half of 2007".
However, Lo thinks that there may be a substantial setback towards autumn and winter as the fire element will disappear in 2008, the year of the Earth Rat, although he does not think that the setback will be as serious as, say, in 1997, which was also a yin fire year, because a hidden wood element in the Pig will provide support to the yin fire even in winter.
In fact, historically, Pig years have usually been good for stock markets. This is probably not surprising since Pig years coincide with the third year of the United States presidential cycle. Those who are familiar with the latter cycle know that such years are usually good years for stock markets.
According to Charles E. Kirk, who publishes The Kirk Report and who incidentally was born in 1971, a Pig year, the S&P 500 has on average gained 16 percent in each pig year since 1935 (see "Year Of The Pig: Market Performance").
Looking back even further, Randolph Buss, editor of Der Invest Informant says that going back to 1899, Pig years have all been positive for the Dow Jones Industrial Average except in 1923 when it fell 3.3 percent (see "Year of the Pig"). However, he does not need "esoteric indicators" to forecast that for 2007, world markets will have a "benign to positive-tendency year" as liquidity will remain intact.
The prospect of liquidity staying intact remains to be seen, although recent events tend to support this view. Last week, both the European Central Bank and the Bank of England left interest rates unchanged, although many analysts still think that hikes are likely later. On the other hand, the Bank of Japan and the Federal Reserve are seen as less likely to hike rates soon, as I discussed last week (see "BoJ and Fed likely to stay sedate on interest rates").
Most analysts agree that stocks have potential for more gains this year.
In an article on 1 February, SmartMoney noted that the analysts it monitored generally expected a "good, though not great, investing year". However, some of the analysts warned that the path for markets may not be smooth.
The article cited Jeffrey Kleintop, chief investment strategist at PNC Wealth Advisors, as saying in his February investment outlook that volatility could rise as a lagged effect of previous changes in the federal funds rate. Citigroup's Tobias Levkovich wrote in January that slowing earnings might not have been fully factored by investors and could contribute to a market pullback in early 2007. Similarly, Thomas McManus of Bank of America Securities wrote in January that "equity markets may experience some disappointment in 2007" as earnings slow.
In fact, last week provided a taste of what could happen. US stocks fell, the Standard & Poor's 500 Index dropping 0.7 percent over the week on concerns that earnings may disappoint after warnings were issued by some major corporations, particularly those linked to the housing sector such as financials and homebuilders. This is despite the fact that the deterioration in the housing market has been known for months.
European stocks, on the other hand, rose last week, the Dow Jones Stoxx 600 Index adding 0.3 percent as investors remained optimistic about earnings prospects. The same appears to hold true with Asian stocks, the Morgan Stanley Capital International Asia-Pacific Index adding 0.5 percent last week to bring the index to a record 143.42.
So the momentum generally remains with the bulls. This means that as stock markets enter the Year of the Pig, they are also entering the fifth year of the bull run.
However, this is a bull run that is getting long in the tooth. Bulls do not run forever. Something or other has always come along to put an end to them. The earnings disappointment suggested by the pundits in the SmartMoney article is just one potential trigger among many. Or as Raymond Lo says, in the Year of the Fire Pig, the apparently rosy outlook could well turn out to be just an illusion.
So while there may still be gains to be made in stocks, investors who are not prepared to face higher volatility might be well-advised not to be too greedy and start taking some bets off the table instead. As the saying goes: Bulls make money, bears make money, pigs get slaughtered.
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