Dear Santa Claus: How about the gift of a market rally? |
Will he surprise us pleasantly, or will he come empty-handed and punish us further?
IT IS THAT time of the year, with December on our doorstep, and Santa Claus is coming to town. Will he surprise us with a gift rally or will he come empty-handed and punish us further?
My analysis of the markets behaviour in December over the past 23 years since 1995 (after the abolishment of the financial rand) makes for interesting reading.
The US market as measured by the S&P 500 index and developed markets as measured by the MSCI World index in dollars experienced rallies (positive returns) in December 2017 out of the 23 years or 74 percent of the time and negative returns in six years or 26 percent of the time.
In the case of the South African market as measured by the FTSE/JSE all share index, positive returns were achieved in 14 of the 23 years or 61 percent of the time and negative returns 39 percent of the time.
So yes, it can, therefore, be derived that the probability of a rally in December in global equity markets is 74 percent, while in the case of the South African market the probability is more than 60 percent.
Conversely, the probability of a pull-back in developed markets is 26 percent and less than 40 percent in the case of the South African market. But how big could the rally be? In the case of the US market, 29 percent of the time the market rallied by between 0.5 percent and 1 percent, 24 percent of the time between 1.5 percent and 2 percent and 29 percent of the time by more than 2.5 percent.
In the case of developed markets, 41 percent of the time the markets rallied by more than 2.5 percent, 24 percent of the time by between 1.5 percent and 2 percent and 18 percent of the time by between 1.5 percent and 2 percent.
In the case of the South African market, 79 percent of the time the JSE rallied by more than 2.5 percent and 14 percent of the time by between 1 percent and 1.5 percent.
But what if Santa lets us down?
In the case of the US markets, 33 percent of the time the S&P 500 fell by less than 0.5 percent, 17 percent of the time the fall was between 0.5 percent and 1 percent, 17 percent of the time by between 1.5 percent and 2 percent, 17 percent of the time by between 2 percent and 2.5 percent and 17 percent of the time the fall was more than 2.5 percent.
In the case of global developed markets, 50 percent of the time the MSCI World Index fell by between 1.5 percent and 2 percent and 17 percent of the time less than 0.5 percent, 17 percent between 1 percent and 1.5 percent, and 17 percent of the time the fall was more than 2.5 percent.
In the case of the South African market, 44 percent of the time the all share index fell by more than 2.5 percent, 22 percent of the time by less than 0.5 percent and 22 percent of the time the fall was between 1.5 percent and 2 percent.
So, yes, there is a good chance that our market may rally in December, and it could be a good one of more than 2.5 percent.
While a solid rally may offer some solace to South African investors, and especially those who have to live off their savings and gritting their teeth out of frustration as a result of the financial pain inflicted by the markets, it is small fry.
The South African Stock market as measured by the all share index is down by more than 13 percent since the end of last year, while some beloved stock such as British American Tobacco is down by more than 40 percent for the year to date. Listed property as measured by the FTSE/JSE Listed Property index, a cornerstone of many retirement plans, lost more than 28 percent in capital value.
While the financial pain was eased by exposure to global equity markets that produced returns of more than 9 percent in terms of rand for the year to date, the regulatory environment limited the cushion impact thereof in retirement funds or plans.
Also, bear in mind that the South African stock exchange as measured by the all share index returned a paltry 3 percent per year over the past three years and underperformed inflation by 2 percent per year – yes, making a mockery of retirement plans and financial planning.
Dear Santa, please have mercy on us and gift us with a rally – we need it so much.
Ryk de Klerk is an independent analyst. Contact rdek@iafrica.com. His views expressed above are his own. You should consult your broker and/or investment adviser for advice.