By Rose Eveleth
Posting in Cities
Can the outcome of the American football championship affect the U.S. stock market? Economists say yes.
In fewer than two weeks, the two best teams in the National Football League will face off in New Orleans for Super Bowl XLVII. The winning team will receive the Lombardi Trophy, along with rings, hats, T-shirts and perhaps even a victory parade in its home city.
But could the outcome also tell investors what's going to happen to the U.S. stock market over the next 12 months, allowing them to invest accordingly? That's exactly what some economists say will happen - and has been happening since 1967.
The phenomenon is called the "Super Bowl Stock Market Predictor." It posits that if an original NFC team wins the prize, the stock market will end the year up, while if an original AFC team wins, the market will end the year down.
This seems like a ridiculous correlation, but from 1967 to 1988 the indicator was right 90.9 percent of the time - 20 out of those 22 years. Since then the accuracy has decreased, but it still hovers at around 76.7 percent - a predictor that still works better many of the methods espoused by professional investors.
Even though the predictor isn't as accurate as it used to be, using the predictor would still put an investor ahead of the curve.
"If you had a stock broker that told you the right thing eight out of ten times you'd do much better than average," says Thomas Kreuger, a finance professor at the University of Wisconsin - La Crosse, who published the first paper about the phenomenon in 1990.
Consider this. If someone had taken $1,000 and invested it according to the Super Bowl predictor from 1964 to 1988, he or she would have have made $21,952, compared with $8,095 they would have earned by just leaving it alone.
Of course, the connection is probably random. But its existence and folk popularity illustrates not just how much humans love patterns, but also how different investors react to cultural trends - random or not.
There are a few caveats that might be skewing the data. Historically speaking, the stock market tends to go up over time, and NFC teams tend to win more often than not. So chances are stacked in favor of the predictor.
But there are some perplexing connections that are difficult to explain.
For example, if the favored winner changes in the days before the big game, the stock market will react accordingly. So if the Green Bay Packers are expected to win the Super Bowl by four points one day, and the next they're expected to win by eight, the stock market will jump along with that change in the odds and point spread.
George Kester, a finance professor at Washington and Lee, who did a follow-up study to reassess just how well the Super Bowl Stock Market Predictor had fared since 1988, says it's hard to imagine anyone investing simply based on their team's win or loss.
Take Super Bowl III (technically the first championship game to bear the Super Bowl name), when the stoic, historic Colts played the young, flamboyant Jets. (Both teams are currently part of the AFC.) When the Jets - lead by Joe Namath - upset the Colts, almost everyone was totally shocked. In order for an upset that dramatic to have an effect on the stock market, Kester says other economic fundamentals technically would need to be weak.
He quips: "People would have to say, 'Something must be wrong with America, this can't happen! I'm going to sell my stocks! Everything is going to hell!'."
The chances of that happening, he says, are pretty slim. And yet, the Dow Jones Industrial Average WAS off in 1969 by 15.2 percent, after two previous years of increases.
Other puzzling indicators
The Super Bowl Indicator isn't the only strange stock market correlation out there. Nor is it the only sport that has an influence.
For example, studies show that when an European or Latin American country's soccer team loses in a big tournament like the Super Bowl - their home country's economy will take a hit. Of course, soccer (or "foot ball" depending on the country you're talking about) is far more important outside the United States than the American version of the sport.
Then, there's the lipstick indicator, which posits that women buy more lipstick when the economy is down to make themselves feel better. So, if lipstick sales go up, watch those stock indexes carefully.
Or the hemline indicator that suggests markets go up in tandem with hemlines. There's even the Vanna White index, which predicted short-term performance based on whether the presenter's dress was short or long, and how it trended over time.
One set of researchers looked at data on worldwide markets and found that the one single factor that best predicted the behavior of the S&P 500 stock index was butter production in Bangladesh.
The study was conducted as a joke, as they write, "intended as a blatant example of totally bogus application of data mining in finance." But it represents quite well that in any complex system there will be random indicators that, purely by chance, predict the right outcome.
That's just what Kester thinks happens with the Super Bowl predictor. "I don't think there's a link at all," he says. "I think it's just fun."
Krueger agrees. "We call it spurious correlation," he says. "Sometimes things are related that are somewhat unexpected, they're anomalies to the system."
The two men have reacted quite differently to what they both agree is a pure coincidental relationship.
For Kester, it's fun and interesting but nothing to take too seriously. It's interesting to muse about what would have happened had he listened to just football as an investment guide. "I would have ended up with three times the wealth, and I would be sitting somewhere with palm trees," he jokes.
But even knowing what he knows now, he probably wouldn't go the Super Bowl finance route.
Krueger actually has invested based on the Super Bowl results. "I am currently, and I have more wealth than I've ever had," he says.
So if an NFC team wins, he puts money into the stock market, and if an AFC team wins, he looks at what he has and sells some holdings. It has worked, over time. "Over the 25 years that I've been doing this, it's worked, it's put me with a higher rate of returns than if I had simply left stock in the market," Krueger says.
It's all a mystery, anyway
Their differing reactions represent two ways people can relate to the stock market, which for many of us seems like a mysterious black box.
The Super Bowl Indicator gives people a simple explanation for these complex events, Krueger says. It provides "the belief that there's a rhyme or reason between phenomenon that are occurring that you may not have any control over."
Anything that offers the promise of better control is appealing, Kester points out. "The track record for people trying to beat the market is very dismal," he says. "So any scheme that can beat the market is going to catch someone's interest."
Especially when that scheme simply involves sitting back and watching a football game. "I mean this is such an outrageous proposition, that one could ignore your education and your broker, and just watch the Super Bowl," he adds.
Still, while there might be nothing logical to the Super Bowl Stock Market Indicator, it still works almost 80 percent of the time. Which is why some investors might choose to punt based on the outcome.
Jan 22, 2013
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Correlation vs. causation. There may be a correlation, although getting much weaker in more recent years. But there is no causational link between super bowl and stock market. This is but one example of the trouble folks will get into when Big Data is used without thinking.
Besides the painful grammatical errors, see above, what exactly is the point of this sort of article in Smartplanet? Sitck it up FOX news/sports/financial. Please spare us.
Terribly sorry about the less than/fewer than mixup. I've fixed. As for the "what's the point" -- not everything on SmartPlanet is about science or technology, you know!