I LIKE THE ODDS…

Why the stock market loves a Colts-Saints Super Bowl…

Wes Moss, CFP®

 In 1990, Thomas Kreuger and William Kennedy published a study in the Journal of Finance that proposed the Super Bowl Indicator (SBI) as a way to predict stock market performance. In short, the theory states that since the NFL/AFL merger in 1967, the stock market goes up when an original NFL team wins the Super Bowl and goes down when an original AFL team wins. Here’s some good news: this year’s Super Bowl between the Colts and the Saints features two old line NFL teams. So if we know an old NFL team winning is the best case for a bull market, I really like my odds… but not enough to bet even a single penny on such a silly indicator…

Upon being revealed, the SBI instantly became famous as it touted a 91% accuracy rate from 1967-1988. It has fallen a little short, however, in the subsequent 20 years after breaking onto the scene. The long term average today is closer to 76%, which has only slightly greater odds than flipping a coin or rolling the dice in Vegas. Although it might be fun to actually try to trade the SBI, the real fun comes when you look at what happens to any amount of money left to compound over time in the stock market. Even when you include the last decade’s dismal average of a -3.3% return annually (including inflation), $10,000 invested in the S&P 500 in 1967 is worth about $83,700 today (accounting for inflation and dividends).

Back in the real world, the direction of the stock market over the last two weeks has been choppy at best. But the pullback we have seen is very healthy and normal to sustain a market rise over the long term. After hitting a high of 10,727 on the Dow, the index touched 10,067 (a 660 point drop) by the end of January. The effects of the Three Big B’s (Bernanke, Barack, and Beijing) were felt around the globe as we moved into the middle of earnings season and continued trying to digest the idea of an America with a 10% unemployment rate.

It is important to remember that YOU can’t control the Three B’s, what happening day-to-day in Washington, or who wins the Super Bowl. What you can control is how you build and balance your retirement plan, 401k, savings, and other investments. Strategic, yet simple, investment opportunities are out there to help you weather a choppy 2010 and beyond. There is a multitude of stocks with premier brand names, predictable cash flows, and healthy dividends. One way to gain access to a whole group or basket of higher-quality, dividend paying stocks would be through the S&P Dividend ETF (SDY), which yields approximately 4%. You can also find diverse fixed income portfolios yielding real returns well above inflation, one example is the Vanguard Total Bond ETF (BND). A combination of both equity and fixed income investments such as these will go a long way in making you a winner for many Super Bowl Sundays to come, and those are odds I will take.