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Putting a number on the Dragon

According to statistics from the Quantitative Guru of JP Morgan AM, the year of the Dragon will tend to be a year of prosperity for US equities with an average performance of 8,3% for the 11 years of the Dragon during this period of 140 years with an annual volatility of 13,5%...

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The Chinese Year of the Dragon has begun today on Monday, january 23 January. An interesting footnote emerged last week from a conversation with JP Morgan Quantitative Guru (QG). He crunched some numbers using monthly S&P index return data back to 1871. The QG found, historically, that the Year of the Dragon has been a very prosperous year for US equities, with an average return of 8.3% for the 11 Dragon years over this 140-year period, with annualised volatility of 13.5%.

Indeed, our guru, born in the Year of the Rabbit, found that the Dragon is the least volatile of the 12 animals and this has contributed to the second higher information ratio.

In case you were wondering, gentle reader, who is the best performing of the 12 animals, history has favoured the Rabbit, with average index returns of 12% and volatility of 17%. This combination just pips the Dragon into second place, but history at least suggests that 2012 could be a better year than suggested by the consensus in early January. But, the most important advice is that investors should enjoy the better market conditions while they last. The Year of the Dragon is followed by the Year of the Snake, which has historically provided the lowest average investment return

According to tradition, the Dragon is known to bring the four benefits of the East : wealth, virtue, harmony and longevity. In fact, unlike the other twelve signs of the zodiac, the Dragon is the most special as it is a mythical creature and not an earthly animal. In this context, we can therefore wait for great moments this year, with spectacular successes and bankruptcies (share allocators be warned). The spirit of the Dragon will be good for business and earnings. The year of the Dragon is also a favourable year for marriage, procreation and the creation of businesses. Clearly this is a year for new starts.

All being well, the year 2012 promises to be full of surprises, no matter what the Zodiac sign. The year of the Dragon is associated with soaring shares markets, natural catastrophies, political and radical cultural changes which will be more the rule than the exception. (current Presidents should take note !). For Ben Bernanke, born under the sign of the Serpent, this year could prove difficult. Serpents are unlikely to see significant gains in business or career matters, and should be wary of bad rumoursIt is also a year where the Serpent should be wary of all extravagance and expenses. Without any doubt the astrologer warns against premature QE3..

From the point of view of market forecasts, history teaches us that the exuberance of the Dragon could leave investors with a hangover of note. The last year of the Dragon, in 2000 was marked by the bursting of the technological bubble when the change of the millennium brought with it the fear of an information virus capable of affecting the monetary markets of the world (fears which were proved to be unfounded.). But the year 2000 was equally a year of excess, ultimately adding salt to the wounds of the investors. Thus, a year busy with events is seen on the horizon, but the importance that investors give to this advice will depend on their belief in Chinese astrology

Kung Hei Fat Choi! [1].

David Shairp , January 2012

Article also available in : English EN | français FR

Footnotes

[1] Happy new year

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