Some charts are too simple for most finance professionals to bother about. This one, from legendary investor Jeremy Grantham of GMO, is one of those. As he noted in January:
“Let’s start with that irritating factor, the Presidential Cycle, so simple sounding that no one in the fee-charging business can afford to be associated with it. And that is presumably why it continues to work.
“The important fact here is that for 7 months of the Presidential Cycle, from October 1st of the second year (this cycle, 2022) through April 30th of the third year (2023), the returns, since 1932, equal those of the remaining 41 months of the cycle!
“This has a less than one-in-a-million probability of occurring by chance, pretty remarkably, and it has been about as powerful in the last 45 years as the previous 45 years.”
THE COMPUTERS LOVED THE IDEA OF BUYING STOCKS
Once again, the indicator hasn’t disappointed – it was up 16.25% from 1 October 2022 to 30 April 2023. And it worked despite 3 of the 4 largest US banking bankruptcies in history taking place since March – as well as a weekend European scramble to rescue Credit Suisse.
Remarkable indeed. And whether, or how, it concerns the Presidential Cycle isn’t really relevant. If it works, it works.
And in the background, computer-trading has been dominating the market, as the Financial Times reported on Tuesday:
“Algorithmically driven hedge funds have been buying stocks at one of the fastest rates in a decade, according to bank trading desks. Quant funds have been piling into US stock markets in response to falling volatility, helping to prop up the market as active managers sit on the sidelines.”
But since the end of March, the S&P 500 has basically gone nowhere. Its weekly close has been an almost flat 4109, 4105, 4138, 4134, 4169, 4136, 4124 and 4192 last Friday.
WHAT HAPPENS, NOW THE “SWEET SPOT” IN THE CYCLE IS OVER?
But now the Cycle is over, and the computers have had their fun, real-world issues may start to dominate the markets again.
One key, but generally, ignored issue is that both Japan and China have a major debt problem, as we have noted in The pH Report:
- “Japan’s debt is now 263% of GDP, and its ‘Abenomics’ policies are now unravelling. Against this background, it is hard to see Japan’s $4.3tn economy being able to grow enough to repay its extremely high levels of debt. It risks seeing interest rates rise to world levels from today’s 0.5%, or seeing the currency come under major pressure as investors sell out
- “China’s debt is 295% of GDP, and its real estate bubble impacts 29% of GDP. The Zero-Covid policy has strained domestic confidence in the government, whilst demographics in the shape of its rapidly ageing population are set to collapse real demand. And now, its real estate bubble is bursting”
Currency markets are certainly starting to suggest that something is happening in Asia, as the charts confirm.
The Bank of Japan essentially now faces a binary choice under its new Governor. Either it raises interest rates to global levels and causes a major repricing of Japanese asset values. Or the value of the yen comes under pressure again.
And as the USD/JPY chart shows, this is what now seems to be happening. Markets are seeing a re-run of the problems seen in H2 last year, when the US$ rose 17% versus the yen in just over 2 months. And in turn, the US$ is now starting to rise versus the Chinese currency, as the USD/CNY chart shows.
The phenomenon of the Presidential Cycle, and the algorithmic games played by the traders’ computers, are now behind us. Instead, worries about the recession and the US debt ceiling talks are moving centre-stage.
But away from the headlines, it could be worth keeping an eye on developments in Asian currency markets. A rising US dollar and US interest rates, and a falling yen and yuan, could soon raise the risks of a major Asian debt crisis.