This week has been quite quiet in the UK. Of note, wages look set to rise more than 3% this year, stronger than 2.6% rise for last year. Subsequently, the Bank of England will probably deliver a rate rise at their March meeting. But we’ll look at the UK in more depth next week.
This week, we take the opportunity to look elsewhere. Today is the start of the new Chinese year. Last year (the year of the Chicken in the 12-year cycle) proved to be pretty good for equity investors. What might this year of the Dog do for equity holders.
For a bit of fun, I’ve looked at the price performance of the Dow Jones Industrial Average since 1930 to see how the years play out. Here’s the table:
Chicken years have done pretty well, beating the average return by almost 7%. Dog years seem to be slightly less beneficial. In overall performance terms, they still beat the average by the small amount of 2.8% but, so far, four out of the seven years have been less than the average.
At least we’re not in the year of the Snake or the Sheep, which both have a history of delivering returns well below the average.
While the exercise is not meant to be taken seriously, it’s interesting that the outlook accords somewhat with our view of how this year might pan out. We expect that the returns of last year will be difficult to repeat.
The global growth in earnings ended 2017 at very strong levels, at the same time as interest rates spent much of the time at historically low levels. Helped by the US tax cuts, analyst expectations of earnings growth were sharply revised higher this January.
The volatility at the start of this month was a reminder that growth is the lifeblood of investment, but it doesn’t necessarily benefit all investments. If you’ve paid up for pretty certain future cashflows, those investments won’t do so well when new opportunities come along which offer better ones.
Here’s the rub. In the “early” stages of a cycle, there tends to be a lot of investor liquidity (aided by loose monetary policy) but few new investment opportunities. As the cycle moves towards its later stages, the business world finds its animal spirits rekindled; entrepreneurs start to offer us new things, soaking up that liquidity through IPOs and bond issues. January saw a lot of business demand for capital, especially for bonds. A bout of indigestion in the new-issue bond market may have been a significant factor in the rise in bond yields.
