What the Super Bowl Means for the Markets and Other Market Prediction Theories
January 26, 2016 | Your Finances
With the Super Bowl® just around the corner, the nation is taking sides and busy making plans for the big night. At this point, it’s down to the Panthers® and Broncos®. Which team will win? Your guess is as good as mine. More is at stake than merely team pride if you put faith in the “Super Bowl Indicator.” This theory holds that when a team from the NFC® wins it all, the market rises; if an AFC® team wins, the market falls.
During the past 40 years, the Super Bowl has consistently predicted the direction of the market—the market has gone up 75 percent of the time that an NFC team has triumphed. While it seems hard to argue with statistics, this type of connection between two unrelated events is more an exercise in coincidence than an actual correlation that makes sense.
The Super Bowl Indicator is just one of many stock market predictive theories. I find that most of these have one thing in common: They happen by chance, which is known as spurious correlation. With the Super Bowl quickly approaching, it seems like a good time to review the most popular theories to see if they hold any water.
As January Goes, So Goes the Rest of the Year
The January Barometer, a theory introduced by the founder of the Stock Trader’s Almanac in 1972, says that if the stock market rises in January, it will end the year in positive territory. Conversely, if the market is negative in January, it will end the year negatively. Between 1950 and 2013, the January Barometer has correctly predicted an up market 92.5 percent of the time and a down market 54.2 percent of the time.1 While the numbers are pretty impressive on the plus side, studies reveal that the numbers are not statistically significant. This is a case in which correlation—a relationship between two factors—doesn’t necessarily result in causation.
The January Effect
The belief that small-cap stocks tend to outperform large-cap stocks during the month of January—known as the January Effect—was first noticed by investment banker Sidney B. Wachtel in 1942. His reasoning is that investors tend to sell small-cap stocks to harvest tax losses at the end of the year and then buy them back in January, inciting a tax-harvesting rally. That rally is seen to exist due to investors selling losing positions in December and then repurchasing the same securities in January after the 31-day wash sale time period expires. If the rule works, those who anticipated this behavior could buy lower at the end of December and sell higher in January. In actuality, small-cap stocks don’t perform any better in January than they do during the rest of the year.2 Before 2000, there might have been some validity to the theory; but in the last 15 years, the advantage seems to have disappeared. Generally speaking, if there is easy money to be made, everybody rushes in—and it’s gone.
Santa Claus Rally
The Santa Claus Rally describes a phenomenon in which stocks rally the last five days of one year and the first two days of the subsequent year. Between 1969 and 2015, the S&P 500 index averaged a 1.4 percent gain during that time period, according to the International Business Times.3 Between 1969 and 2013, stocks have risen 34 out of 44 holiday seasons.4 Like the other theories that float around to describe market performance, there is no legitimate factor behind this trend outside of the tendency for stocks to increase over time.
The Seven-Year Shmita Cycle
This one is gaining more popularity as this current bull market ages. “Shmita” refers to teachings in the Torah that say the land should rest every seven years. Some market theorists extrapolate this seven-year cycle to market and economic prediction. The financial crisis that began in 2008 and the terrorist attack in 2001 are used as evidence to support this view. Since 1950, markets are split in terms of following this theory: Half the time markets were up and half the time down. My thought is that in almost any year there are going to be good things that happen along with the bad, sometimes very bad, things. It would be very easy to look back over history and find events that fit with a certain time cycle.
Long-Term Investing: A Solid Strategy
Trying to use market prediction theories to determine the future course of the market is an exercise in futility. I believe the best way to invest for the long term is by constructing a well-diversified portfolio based on your risk tolerance and rebalancing periodically. This simple step forces the portfolio to engage in the most basic premise of investing: buy low and sell high.
The market will once again correct someday and then recover. When and by how much? I have no idea. What I do know is that the market is driven by economic forces rather than dates on a calendar and who won the Super Bowl. However, as a Bears fan, I would not be upset if NFC teams won a few more Super Bowls and the market went up. That’s a win-win!
1“Dow Plunges with Worst Opening Day Since 2008: Is January Barometer, Santa Rally Real?,” International Business Times, 1.4.16 http://www.ibtimes.com/dow-plunges-worst-opening-day-2008-january-barometer-santa-rally-real-2248605
2“The Mythical January Effect,” CNBC, 12.29,14, http://www.cnbc.com/2014/12/29/the-mythical-january-effect.html
3“Dow Plunges with Worst Opening Day Since 2008: Is January Barometer, Santa Rally Real?,” International Business Times, 1.4.16 http://www.ibtimes.com/dow-plunges-worst-opening-day-2008-january-barometer-santa-rally-real-2248605
4“Here’s the Deal with the Santa Claus Rally Traders Talk About,” Business Insider, 12.22.14, http://www.businessinsider.com/santa-claus-rally-history-2014-12
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee WI (NM) (life and disability insurance, annuities and life-insurance with long-term care benefits) and its subsidiaries. Northwestern Mutual Wealth Management Company®, Milwaukee, WI (NMWMC) (fiduciary and fee-based financial planning services), subsidiary of NM, federal savings bank. Northwestern Mutual Investment Services, LLC (securities), broker-dealer, registered investment adviser and member FINRA and SIPC.
The opinions expressed are those of NMWMC as of the date stated on this material and are subject to change. This material does not constitute investment advice, is not intended as an endorsement of any specific investment or security and is not a prediction of what will happen in the markets. Information and opinions are derived from proprietary and non-proprietary sources. Please remember that all investments carry some level of risk, including the potential loss of principal invested.
“Super Bowl,” and “AFC,” “NFC,” are registered servicemarks of NFL Properties LLC, “Panthers” is a registered servicemark of Panthers Football LLC, and “Broncos” is a registered servicemark of PDB Sports, LTD. DBA Denver Broncos.