The bull market may now be facing its ultimate threat: Tom Brady and the New England Patriots.
That's because the Patriots are 5½ point favorites to win the Super Bowl on Feb. 4 and the venerable Super Bowl Indicator is bearish whenever the victorious team traces its roots — as can the Patriots — back to the original American Football League.
I doubt that the bull is very worried, however. Despite widespread belief on Wall Street that the Super Bowl Indicator has an impressive track record, in fact it's worse than a coin flip. The stock market has actually performed better, on average, following Super Bowl victories by teams that trace their roots back to the original AFL.
The Patriots won last year's Super Bowl, for example, and yet the S&P 500 (.SPX) is 22% higher today than where it stood then. Indeed, Super Bowl 2016 was also won by a team that traces its roots to the original AFL — the Denver Broncos — and the stock market also rose strongly over the subsequent year.
Nor are these last couple of years unusual. Consider the stock market's performance between the Super Bowl and Dec. 31 in all years since 1978. Following victories from an original AFL team, the S&P 500 has risen 81% of the time, gaining an average of 9.4%. Following victories from an original NFL team, in contrast, the S&P 500 has risen 76% of the time, gaining an average of 9.1%.
To be sure, none of these differences is even remotely significant from a statistical point of view.
Note carefully that, unlike many others who have tabulated the Super Bowl Indicator's track record, I am only counting its success rate since 1978. That's because, to the best of my knowledge, that was when it was "discovered" by Leonard Koppett, a sports writer for the New York Times. (The indicator was subsequently developed by William LeFevre, editor of a newsletter called the Monday Morning Market Memo, and Robert Stovall, who at the time was President of Stovall Twenty First Advisors.) As you remember from Statistics 101, the meaningful test of an indicator is its track record in real time, after it was discovered.
The bottom line? In a roundabout way, the Super Bowl Indicator can make us better investors. But it won't be by using the genealogy of the victorious team to forecast the market. Instead, this will happen if we use it to more fully appreciate the need to be rigorous and objective in our use of statistics.
If you can do that, then you can fully enjoy the big game itself without concern about what it might mean for your portfolio.