The Markets January 30, 2008

Could Perfect Pats Pummel Portfolios?

Perfection is a rare thing, particularly in sports.

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But should the New England Patriots prevail in Super Bowl XLII, capping off a perfect 19-0 record, that could spell trouble for investors – if you adhere to the tenets of the so-called Super Bowl Theory.

For the “uninitiated,” the theory (invented/popularized by the late New York Times sportswriter Leonard Koppett) says that a win by a team from the old National Football League is a precursor to rising stock values for the year (at least as measured by the S&P 500), but if a team from the old American Football League (AFL) prevails, stocks will fall.

The AFC Champion New England Patriots – who were once the Boston Patriots – came from the AFL. The NFC Champion New York Giants, on the other hand have a long and storied tradition in the old NFL. Both teams also have a Super Bowl tradition of their own; Sunday will mark the fifth appearance by the Patriots, and the fourth for the Giants. There’s even a recent history between these two teams – the last night of the regular season, where New England had to come from behind to keep their unbeaten streak alive.

Recent History

Last year the S&P 500 rose 3.53% as the AFC Indianapolis Colts (but they once were the NFL Baltimore Colts) beat the NFC Chicago Bears 29-17. Of course, according to the Super Bowl Theory, the markets were due for an increase no matter what happened, since both teams were legacy NFL franchises (see If the Bears Win, Will the Bulls Run?).

Similarly, in 2006 the Pittsburgh Steelers defeated the Seattle Seahawks – both legacy NFL clubs – and, of course, 2006 was a good year for equities, with the S&P 500 closing up more than 13%.

But could such an odd indicator really work? Believe it or not, since the first Super Bowl was played in 1967, the so-called Super Bowl indicator has correctly forecast the S&P 500’s direction 3 out of 4 times. Unfortunately for those looking for a clear winning strategy, the Super Bowl indicator has had only one clean win in the past ten big games (it’s hard to count the past two years as a “win’).

Patriot’s Gains?

Consider the AFC New England Patriots’ 24-21 win over the NFC Philadelphia Eagles in 2005. According to the Super Bowl Theory, the markets should have been down for the year. However, in 2005 the S&P 500 climbed 2.55%.

Of course, the 2002 win by those same New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots 2004 Super Bowl win against the Carolina Panthers failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss.

Consider also that, despite victories by the old AFL Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL legacy St. Louis (by way of Los Angeles) Rams and the Baltimore (by way of NFL legacy Cleveland Browns) Ravens did nothing to dispel the bear markets of 2000 and 2001⁽¹⁾.

“Perfect’ Predictor?

Of course, the last (and only) time that an undefeated team has made it to the Super Bowl was the 17-0 1972 Miami Dolphins (the football seasons were shorter then). Their 14-7 victory over the Washington Redskins in the 1973 Super Bowl (and their subsequent year 24-7 victory over the Minnesota Vikings in Super Bowl VIII) accurately foreshadowed a two-year bear market that took prices down more than 50% (17.4% and 29.7%, respectively).

All in all, the Super Bowl Theory has been on the money 32 years out of 40, but in true sports fashion, has had some winning streaks and some rough patches. Consider that it “worked’ 28 times between 1967 and 1997 – then went 0-4 between 1998 and 2001 – only to get back on track from 2002 on (purists still dispute how to interpret Tampa Bay’s victory in 2003, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

As for Sunday – the oddsmakers are giving the edge to the Patriots, but, at least according to the Super Bowl Theory, investors should be betting against the house.

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⁽¹⁾Other exceptions included: 1970, when AFC Kansas City won, and the S&P index gained 0.1%; 1984, when AFC Los Angeles Raiders won, and the S&P rose 1.4%; 1990, when NFC San Francisco prevailed, and the S&P lost 6.56%; and 1994, when NFC Dallas triumphed, but the S&P index fell 1.53%.