Market Beat: The Super Bowl Indicator 2018
January 30, 2018
The Super Bowl Indicator is one of my favorite stock market indicators. I write about it every year. This year's game should be an interesting matchup between the Philadelphia Eagles and the New England Patriots. Both teams have 13-3 records. If you're into sports betting it looks like the Patriots are favored at the sports books. The current spread is 4.5 points.
The Super Bowl Indicator was created by a sports writer and the way it works is pretty simple. I should say the way it's supposed to work. Supposedly, if a team from the NFC wins, that will be a good year for the stock market and if the AFC team wins, then it will be a bad year for stocks.
The Patriots are from the AFC, so if want to see stocks go up even more this year then you should be rooting for the Eagles. If you want stocks to drop for a buying opportunity then you can root for the Patriots. The Super Bowl Indicator has about an 80 percent accuracy rate, so it is fairly reliable.
Seriously, the outcome of a football game has nothing to do with stock market returns. The accuracy rate is entirely coincidental. Of my favorite sayings is, "Correlation does not imply causation" and the Super Bowl Indicator is an excellent example of this. Even though the market results following the big game have behaved a certain way 80 percent of the time, it is entirely coincidence.
Correlation is very important to understand, especially if you're looking to build a diversified investment portfolio. By combining asset classes that historically have low correlation, it is possible to build a portfolio that should provide decent returns with less volatility than an all-stock portfolio. Younger people should be fine with an all-stock portfolio if they have the patience to ride out the inevitable bear market cycles.
As you start getting older it's important to add other asset classes, like fixed income, absolute return, real estate, natural resources and private equity. International exposure should be included as well. International equities, fixed income and real estate can provide for additional diversification.
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There have been several academic studies done that conclude that a portfolio of highly diversified assets with low historical correlation can produce good returns with lower volatility.
Enjoy the game and don't worry about its influence on your investments, I hope it's a good game.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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