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Simple Indicators In A Complex World

Key Points
  • When people feel a situation is too complicated, they often fall back on rules of thumb to make decisions.

  • We are often asked about market clichés like the "Super Bowl indicator" during this time of the year which can be revealed to have coin flip accuracy.

  • Fortunately, there are tangible indicators that are more effective and point to another year of gains for stocks amid rising volatility.

As investors ponder what the year may hold in store for the markets, the interrelationships between politics, economics, fiscal and monetary policy, and corporate actions can seem complex. Investors can feel overwhelmed and seek a simple answer. When people feel there is a situation that is out of their control or that it is too complicated to analyze, they often fall back on rules of thumb to make decisions.

We do not place any value on market clichés like the "January Effect" or the "Super Bowl indicator," but we are often asked about them during this time of the year. Jittery investors are looking for clarity in an environment where little is certain.

Super Bowl

Market prediction for 2017: Loss

Historical accuracy claim: 85%

The Super Bowl indicator claims that the stock market goes up for the year as a whole when the winner of the Super Bowl comes from the NFC, but when an AFC or expansion team wins, the market falls. Going into the 1998 Super Bowl when the underdog Denver Broncos defeated the Green Bay Packers, the Super Bowl indicator had been correct in 23 of 27 years, or 85% of the time, measured using the MSCI World Index.

However, since 1998, the Super Bowl indicator has had a poor record; it has only been correct about 50% of the time. The most notable failure was the New York Giants' upset win in 2008 over the New England Patriots, which was supposed to bring about a bull run for stocks—instead the Dow plunged that year as the financial crisis took hold. This year's matchup on February 5 was widely watched, but not for its forecasting ability.

Super Bowl Indicator not so super at forecasting

Super Bowl Indicator not so super at forecasting

Source: Charles Schwab, Bloomberg data as of 2/3/2017.

Past performance is no guarantee of future results.

January Effect

Market prediction for 2017: Gain

Historical accuracy claim: 83%

As January goes, so goes the year according to this market adage. It is true that January has more consistently indicated the direction of the stock market for the year than any other month. When January was positive for the MSCI World Index, the year as a whole ended with a gain 83% of the time since 1969, when the index began.

Again, this sounds impressive, but when January was negative, the year suffered a loss just one-third of the time. It seems January doesn't really have much of an "effect."

January Effect not very effective at forecasting

January Effect not very effective at forecasting

Source: Charles Schwab, Bloomberg data as of 2/3/2017.

Past performance is no guarantee of future results.

First five days

Market prediction for 2017: Gain

Historical accuracy claim: 81%

This popular piece of market folklore says that the direction of the stock market during the first five days of the year determines whether the world's stock markets will be up or down for the year. The support for this indicator comes from the fact that of the 26 times the first five days of January have posted a net gain over the past 35 years, 21 were followed by full year gains for the MSCI World Index—at first glance an 81% accuracy level. But is it significant? Not very. Here are three things to keep in mind:

  1. The MSCI World Index has posted a gain for the year more than 70% of the time, no matter what the first five days have done. 
  2. A decline in the first five days has been accurate only about one-third of the time at predicting a down year.
  3. The most recent exception was just last year, when stocks posted a loss in the first five days, but the index rose for the year. A notable exception was in 2002 when stocks posted a gain for the first five days only to end up with one of the worst years on record.

Groundhog Day

Market prediction for 2017: Gain

Historical accuracy claim: 74%

If the world's most famous forecasting groundhog, Punxsutawney Phil, sees his shadow we are expected to get six more weeks of winter, rather than the cold giving way to an early spring. A lesser known prediction that accompanies seeing his shadow is for a gain in the stock market.  When Phil sees his shadow, temperatures have been colder than usual in the U.S. 47% of the time since 1969—a coin flip. However, he is much better at predicting stock market performance. The stocks around the world (MSCI World index) have been up 74% of the years Phil has seen his shadow, as he did this year on February 2.

Of course, the fact that the stock market has posted a positive total return 74% of the time regardless of whether Phil saw his shadow or not makes Phil's stock market prediction about as useful as his weather prediction.

Groundhog forecast accuracy is just a shadow

Groundhog forecast accuracy is just a shadow

Source: Charles Schwab, Bloomberg data as of 2/3/2017.

Past performance is no guarantee of future results.

Chinese Lunar New Year

Market prediction for 2017: Gain

Historical accuracy claim: 66%

2017 is the year of the rooster. A look back at average annual world stock market returns by Chinese zodiac sign shows us that the year of the rooster has been close to the average in terms of performance.

However, there have only been three prior years of the rooster since the inception of the MSCI World Index and those covered a wide range of returns: 1981 -3%, 1993 +23%, and 2006 +10% demonstrating the inconsistency in this indicator of market performance.

No sign of accuracy: average annual global stock market performance by zodiac sign

No sign of accuracy: average annual global stock market performance by zodiac sign

Source: Charles Schwab, Bloomberg data 02/02/2017.

Past performance is no guarantee of future results.

No easy answers

The enduring popularity of these strategies for investment decision making—despite their history of at best coin-flip accuracy when examined closely—is a testament to a desire for an easy answer on how to invest in today’s interconnected and complex markets.

For investors looking for tangible indicators of growth in the economy and markets here are five more meaningful indicators may offer real insight, such as:

  1. World merchandise trade volume breaking out to a new all-time high as of the latest November reading.
  2. Copper prices have risen 20% over the past three months, an indicator of construction and manufacturing activity.
  3. Rebounding vehicle sales around the world in December and January, reflecting a rising willingness to spend on large ticket items even as financing rates creep higher.
  4. Business loan demand in Europe rising at the strongest pace since before the financial crisis.
  5. Manufacturing activity is picking up as can be seen in the global manufacturing purchasing managers' index rising steadily in recent months to near the highest level in five years.

While markets may exhibit increasing volatility, we believe the bull market remains intact supported by tangible and effective indicators of global growth. For more useful indicators see: Five Reasons to Stay Invested Despite Heightened Uncertainty.

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Important Disclosures

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