Super Bowl Stock Market Predictor Still a Winner, According to W&L Professor
Even before the New Orleans Saints and Indianapolis Colts step on the field for Super Bowl XLIV, one result has already been determined–stocks will be up for 2010. Or so says the Super Bowl Stock Market Predictor.
Washington and Lee University finance professor George Kester has authored a new study that determines that, over the course of the event’s 43-year history, the Super Bowl winner has correctly predicted whether the market will go up or down 77 percent of the time.
Beyond the up or down prediction, Kester, the Martel Professor of Finance in Washington and Lee’s Williams School of Commerce, Economics, and Politics, found using the Super Bowl model would have resulted in an impressive return on investment.
Here’s what the Super Bowl Predictor maintains: If the team that wins the Super Bowl has its roots in the original National Football League, the market will increase. If the winning team was originally from the old American Football League, the market will decline.
“My very tongue-in-cheek explanation for this phenomenon is based on the first time that a team from the old AFL won, which was Super Bowl III in 1969, when the upstart New York Jets and quarterback ‘Broadway’ Joe Namath stunned the heavily favored Baltimore Colts,” Kester said. “Investors thought the Jets’ upset victory meant there must be something amiss in America and it was time to sell, and that’s been built into the American psyche ever since.”
Of course, that probably is as good an explanation as any for the phenomenon that began to be tracked in the mid-1980s and led two researchers to do a rigorous academic examination that was published in the prestigious “Journal of Finance” in 1990.
The researchers, Thomas M. Krueger and William F. Kennedy, found that the Super Bowl Predictor had been correct 91 percent of the time for the 22-year period of 1967 through 1988.
“For some time I had been interested in repeating and updating this study,” said Kester. “In addition to determining whether the predictor was correct in determining up or down markets, I was also curious whether the model could predict especially strong bull markets and especially bad bear markets and outperform a buy-and-hold strategy.”
Kester constructed a back-test with a beginning portfolio of $1,000 that he invested in S&P 500 stocks or Treasury bills, depending upon which team won the Super Bowl.
“Interestingly, over the entire history of the Super Bowl, my wealth would have been more than twice as great had I used this strategy rather than a passive buy-and-hold strategy with the S&P 500,” he said. “I took brokerage costs into account whenever I sold T-bills and invested in stocks and vice versa, and I also included dividends on the S&P stocks. The dollar values of the portfolios at the end of 2008 would have been $43,000 for a buy-and-hold strategy and $105,000 for the Super Bowl market-timing strategy.”
Along the way, Kester tried one other wrinkle. After the AFL and NFL merged in 1970, professional teams have played in two divisions of the NFL–the American Football Conference and the National Football Conference. So he ran a second test to see if using the teams’ current conference affiliation would have the same effect. It doesn’t. Overall prediction accuracy with the conference approach was about 58 percent as opposed to 77 percent accuracy using the old AFL and NFL affiliations.
“Of course, you have to do a research project like this with a sense of humor and realize that this is spurious correlation,” said Kester. “It would be difficult for me to recommend to any investors that they base their strategy on a football game. On the other hand, in hindsight, the superior investment performance of the Super Bowl market-timing strategy speaks for itself.”
Kester did not say whether he had called his broker when the New York Jets lost in this year’s conference championships. That Jets’ loss meant that the final two contestants in the Super Bowl, New Orleans and Indianapolis, are both rooted in the old NFL. So no matter who prevails on Super Sunday, investors may be the big winners.