The Super Bowl Indicator: will equities Buc up?

It was the Super Bowl yesterday, with the Tampa Bay Buccaneers taking on the Kansas City Chiefs. The long-shot Buccaneers were the comfortable winners. Tom Brady, their 43-year-old quarterback, won his seventh title – more than any individual franchise in the Super Bowl’s history.

Students of financial markets might be unusually interested in the result. According to the ‘Super Bowl indicator’, if a team from the American Football Conference (the Chiefs this year) wins, an equity bear market will follow. If a team from the National Football Conference (the Buccaneers) wins, it will be a bull market. So given the Bucs’ triumph, should investors celebrate?

When the indicator was first suggested by Leonard Koppett in 1978, it had never been wrong. But if you want an example of spurious relationships and over-engineered financial analysis, look no further!

Rather like factor strategies in general, the Super Bowl indicator has been going through a difficult time of late. It has called the market incorrectly in each of the past five years, although given our medium-term positive view on equities, perhaps we should hope that pattern is about to break.

Nevertheless, there’s a clear warning here for anyone substituting a backtest for serious thought. We have long been students of the behavioural aspects of finance – from old maxims like ‘sell in May’ to phenomena like crowding and seasonality – but only on the basis that informed preparation is preferable to speculative prediction. That seems in keeping with how Brady gets himself ready for games.

Data-mining – the process of looking for anomalies, patterns, and correlations within large datasets – will always produce results that look compelling. Our task as analysts is to separate the specious from the meaningful. Quantitative analysis alone will not provide the answer. In the words of Mervyn (now Lord) King, the former Governor of the Bank of England, “thinking needs to be liberated from the tyranny of regressions”.

There is a golden rule of finance hidden in here: when an investment strategy looks too good to be true, it almost always is.

Unfortunately, nothing in life is certain except death, taxes … and Tom Brady.