Financial Literacy

Could A Patriots Super Bowl Win Deflate the Stock Market?

A football isn’t the only thing in danger of being deflated by the New England Patriots. According to the “Super Bowl Indicator,” the team might also have a hand in deflating the stock market.

I’ll explain…

The Super Bowl Indicator is based on the idea that markets go up during years when an “old-line NFL ” (NFC division) team wins, and down if an old AFL (AFC) team wins.

This means that, come Sunday night, if Tom “Shady Brady” and Bill “Belicheat” raise the Lombardi Trophy for the fourth time together, we could be looking at a down year for stocks.

At Investment U, we know better than to mix stock market analysis with sporting outcomes. But just for fun, let’s take a look at what this indicator has to offer.

Remarkably Accurate

In 39 of the past 48 years, the Super Bowl Indicator has successfully predicted the direction the Dow Jones Industrial Average would head. That’s an impressive accuracy rate of 81.25%.

Economists of the highest stature wish they could boast such a track record. Currently, the indicator is on a six-year winning streak.

(*For those spotting the discrepancy in both the Steelers and Ravens being counted in the “old-line NFL” side, I’ll get to that convenient modification a moment.)

As you can see in the chart, the Seattle Seahawks’ 2014 Super Bowl win was followed by a 7.5% rise in the Dow.

But before you go adding money to your trading account in anticipation of another Seahawks win at the 2015 Super Bowl, let’s dig a little deeper.

Correlation vs. Causation

While the Super Bowl Indicator has done a superb job of predicting the market in the past, it doesn’t mean they are connected. Simply put, correlation does not imply causation.

Consider this analogy: Popsicle sales rise in the summer… and so do car accidents. So we have a correlation. Do these two things have anything to do with each other? No. Should America enact a strict policy banning popsicles in automobiles? Maybe.

But any sound-minded person knows that Popsicle sales go up in the summer because it’s hotter and people like a nice treat to cool down. They should also know that there are more car accidents in the summer because the weather is nicer and there are more people out driving.

There’s no direct link between these two statistics. The causation isn’t there. And the same goes for the infamous Super Bowl Indicator. We might see a correlation – a very strong one at that – but where is the causation?

Does the stock market decide to slow down because a certain team wins the super bowl? Do stocks ignore economic fundamentals, earnings reports, supply shortages, fluctuating consumer demand and just skip right to the Super Bowl winner to determine its performance for the year? Once again, no.

Here are some more red flags to drive home just how far off this indicator can be…

  1. When the New York Giants (an NFC team) won the Super Bowl in 2008, this should have provoked a Bull Market. But as we know, that year the stock market underwent one of the worst downturns since the Great Depression. The Dow finished the year down over 33%.
  2. After the Patriots (an AFC team) won in 2002, the market tanked 21.5%. But following their next two championships in 2004 and 2005, the market produced annual returns of 10.6% and 4.8%, respectively.
  3. The rules that govern the Super Bowl Indicator seem to change in order to support its thesis. (This refers back to the convenient Ravens and the Steelers modification in the chart.) For example, the Pittsburgh Steelers have won six super bowls. Yet they are in the AFC today. The Super Bowl Indicator conveniently counts the Steelers’ original NFL side as their starting point. Those six years, in turn, boost the indicator’s accuracy from 68.75% to over 80%. Convenient indeed.

    The same goes for the Baltimore Ravens and the Indianapolis Colts. Today they are both AFC teams. But the indicator conveniently places them in the old-line NFL category. It notes that the Colts were originally a NFL team in Baltimore before moving to Indianapolis. And the Ravens were originally the Cleveland Browns that have their roots in the old NFL side as well. And fittingly, let’s just ignore the fact the Browns are back in Cleveland.

    So if you remove the Colts, Ravens and Steelers from the old-line NFL the indicators accuracy rate falls to 62.5%. The entire correlation is thrown out following this reasoning.

  4. Historically speaking, the stock market goes up more often than it goes down. Since the first Super Bowl in 1967, the Dow has risen 35 years out of 48. Over that same time frame, NFC/old-line NFL teams won 34 Super Bowls. Here we find the correlation’s key statistical secret: in over four decades, the stock market finished up 72.9% of the time and the NFC won 70.8% of all Super Bowls. This overlap contributes to correlation, not causation. The only viable conclusion is that the AFC is struggling to win championships.

If you are looking to the Super Bowl indicator to help make your investment decisions this year, I would urge you to visit the replay booth. This is a bad call that needs to be reversed.

Instead, focus your investment playbook on things that actually cause stocks to rise and fall, like economic fundamentals and individual stock metrics. A nice dose of proper asset allocation and attention to your investment time horizon is also suggested.

Good investing,

Ryan Fitzwater

Have thoughts on this article? Share your Super Bowl pick or where you think the market is heading next in the comments below.

photo credit: http://en.wikipedia.org/wiki/Tom_Brady

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