Market Beat: The Super Bowl Indicator and Spurious Correlation
TRUCKEE, Calif. andamp;#8212; If youandamp;#8217;re looking for a stock market indicator that has an 80 percent success rate in forecasting market direction, just wait until the big game is over Sunday.The way the Super Bowl indicator works is simple. First step is to the check the score of the Super Bowl andamp;#8212; if a team from the old NFL (NFC) team wins the Super Bowl, the Dow Jones Industrial Average should have a good year. If a team from the old AFL (AFC) wins, that is a bad omen for the market. Super Bowl I was played in 1967, and since that time the indicator has worked 80 percent of the time, it has been accurate on 36 out of 45 occurrences. Before 1997 it was correct 28 out of 31 times. So, this year a Patriots win might be bad for the market, where a win by the Giants should be considered to be a good sign.However, the last time the Patriots and Giants met in the Super Bowl, the Giants won, which should have been good for the market, but that was 2008, which ended up being the third worst year on record. The Sandamp;P 500 ended up falling 38.50 percent in 2008.Whether youandamp;#8217;re a Giants fan or a Patriots fan, I wouldnandamp;#8217;t advise letting the outcome of the game determine your investment strategy. You may hear a lot about the Super Bowl indicator, but I wouldnandamp;#8217;t take it seriously.Indicators like this are examples of whatandamp;#8217;s known as andamp;#8220;spurious correlation,andamp;#8221; which means that even though the success rate of this so called indicator is remarkable it is also purely coincidental. A good way to put it is that correlation does not imply causation, so even though we see evidence of correlation, it doesnandamp;#8217;t prove that the outcome of a football game has any direct influence on stock market returns.There are other examples like this for the stock market, one is the so called andamp;#8220;hemline indicatorandamp;#8221; first presented by economist George Taylor in 1926. The theory suggests that hemlines on womenandamp;#8217;s dresses rise with good economic times and fall when the economy turns sour. Recent research from 2010 shows that the hemline indicator is still validMy advice is to enjoy the game, root for your favorite team and donandamp;#8217;t let the outcome of a football game or the length of someoneandamp;#8217;s dress determine your investment strategy.Kenneth Roberts is a Truckee based Registered Investment Advisor. Ken has been in the securities business since 1992, has worked as a branch manager for a major Wall Street firm, and is currently a portfolio manager for Fusion Asset Management. Information on his money management service can be found at http://www.fusiontargetretirement.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.