Super Week

The week is not half-way over and already it is indeed SUPER. The Super Bowl reminded even the most ardent Patriots fans that like markets, sometimes the most improbable of circumstances can combine to create an outcome that defies expectations. (To read more about this topic, get a copy of Nassim Nicholas Taleb’s book, “The Black Swan: The Impact of the Highly Improbable.”) In the end, it is always helpful to remember that unexpected events with extreme impact are nearly impossible to predict, despite our desire to explain them in retrospect.

This is also a handy nugget to keep in the back of your mind as we kick off Super Tuesday today on the campaign trail. The lengthy primary season has seen the focus shift from war to experience to electability and now, to use the famous James Carville term, “It’s the economy, stupid!” American voters are feeling blue about how they are doing and many have wondered, “Which party/candidate would be best to help us get back on more solid footing?”

In fact, I have been asked repeatedly to make a case for a Republican or a Democrat win based on economic policy, but it’s not that easy. Conventional wisdom says that Republicans reduce taxes and spending, while Democrats increase them. As a result, investors have long thought that a Republican win is better for their portfolios—that is until they take a look at President Bush’s two terms. Yes, there were tax cuts, but they came with a historic amount of spending. That’s not just his fault—after all, he needed Congress to get the party started.

But like the unexpected outcome of the Super Bowl, data debunks the Republican/Democrat market expectations. On average since 1901, the stock market had performed better (in both nominal and real terms) when a Democrat was president than when a Republican sat in the oval office. Republicans are quick to point out that this result was due to the inclusion of the Hoover and Roosevelt presidencies which included times of extreme duress. That being said, sometimes it is hard to predict how a candidate will act once he or she is in the Oval Office.

Considering that the margin between the two parties is so small, voting based on past performance would seem like just as bad a predictor with regard to election outcome as assuming that simply because the Patriots won 18 games that they would win the Super Bowl. But while we are on the topic of football, I can’t forget to include one more inane bit of data for our Super Week: the Super Bowl Indicator (SBI).

According to the SBI, a Super Bowl win for a team from the old AFL (AFC division—the New England Patriots in this year’s contest) foretells a decline in the stock market for the coming year, and that a win for a team from the old NFL (NFC division—the New York Giants) means the stock market will be up for the year. Amazingly, the predictor has been correct 80% of the time. So here is a soothing note for Patriots fans: maybe your team’s loss will be a boon to your portfolio!