Since it's almost time for kickoff, I thought it would be fun to pay a visit to one of Wall Street's favorite "indicators" of stock market performance. This is right up there with "as January goes, so goes the year" but has it's roots firmly planted in legitimate stock market analysis: The Super Bowl.
As the saying goes, a victory by an NFC team foretells an up year for the stock market, while an AFC Super Bowl champ is bad news for investors. But does it work? Well, that's just what I set out to determine.
The methodology was simple. The first Super Bowl was played in 1967. I created a spreadsheet tracking three things: 1. The winner of the Super Bowl, 2. the performance of the S&P 500 for each year from 1967 to 2007, and 3. the average t-bill rate for each year. I then tracked the growth of a hypothetical $10,000 from 1967 to 2007 fully invested in the S&P 500 for the entire period. Next, I tracked the growth of $10,000 if you were invested in the S&P 500 in years in which an NFC team won the Super Bowl, and in t-bills in years in which an AFC team won.
You might be surprised by the results.
After 41 Super Bowls, the AFC won 20 times. In only 7 of those years, the market was negative. Looks like a failure, right? I mean, you would have been out of the market for the last four years, since New England won their second Super Bowl in 2004. You would have missed the great tech stock boom of '98 and '99 following Denver's back to back Super Bowl wins.
Well, the AFC teams, Baltimore and New England also won in 2001 and 2002, both negative years for the US Stock Market. Not only that, but followers of the Super Bowl Indicator also missed the bear market of '73-'74 when the legendary Dolphins were taking home the trophy.
So, what where the final results? By staying in the S&P 500 from 1967 through 2007, your hypothetical $10,000 would have grown to $680,318.13. But by jumping in and out of the market depending on which conference won the Super Bowl, you would have ended with $848,793.55.
Wow! Take that Buy and Hold! Right? Well, isn't that what that means? It's clear that we should pull all of our money out of the market if the Patriots win, but stand pat if Eli Manning somehow pulls off the big upset. Well, maybe not so much.
What are we forgetting here? Well, taxes and transaction costs. Let's assume that transaction costs are minimal, this still would have involved selling off and buying back your entire portfolio seven times in 40 years. Don't forget, capital gains taxes were not always so low. In fact, until a few years ago, it has consistently been in the 20s-30s. If transaction costs didn't impact your portfolio, you can bet that taxes took a big huge bite out of your return. Each time you sold off.
What else are we forgetting here? Oh yea, this whole thing is based on a FOOTBALL GAME! Frankly, I'm pleased as punch that the results came out the way that they did. This shows, in black and white, that there is a correlation. But let's not forget the adage, "correlation does not equal causation." Sometimes, if you look hard enough, you will find patterns that, looking backwards, would have told you something about the markets. Technical analysts look at charts of stocks and find curious patterns that they give cute names like "cup and handle" or "head and shoulders" and "rising flags."
Of course, much of the success is based on the fact that the legendary Dolphins teams won the Super Bowl in '73 and '74, two of the worst years for the market since the Great Depression. Looking back on that fact, an "indicator" was born. What if you began following the Super Bowl Indicator in 1980, rather than 1967? Totally different story. Buying and holding the S&P turns your $10,000 into $305,075, while the Super Bowl Indicator turns your $10,000 into $276,198. Again, that doesn't factor in transaction costs and taxes.
There's a basic flaw in my methodology. The data assumes that you are our of the market on January 1 in years in which the AFC wins the Super Bowl. However, you don't know who will win the Super Bowl until late January or early February.
What does all this mean? There are endless "indicators" that investors can follow, and some appear to have powerful predictive ability. Many have convincing rationale behind why it works the way that it does. Ultimately, all of them resort to little more than data mining for correlation, and hoping that the correlation continues. In our opinion, Super Bowl winners and chart patterns may work at times, but in the long run, you are better off not trying to time the market, and keeping turnover costs to a minimum.
But just in case, Go Giants!
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Posted by: Stock Picks | December 05, 2008 at 01:11 AM