23 Oct Can the World Series Predict Stock Market Returns?
Does the World Series determine market returns? Should you really change your investment plans based on an Red Sox or Dodger victory?
The answer to both of these is a resounding “NO”, but on the day the 114th World Series is set to begin, let’s have a little fun and explore the connection.
The World Series
The inaugural World Series took place in 1903, with the Pittsburgh Pirates, National League champions, competing against the Boston Pilgrims (now Red Sox), American League champions. Boston won that first World Series and through 2017, there have been 113, occurring every year except 1904 and 1995.
The American League has outpaced the National League in these contests, 65-48. The New York Yankees have taken the lion’s share of AL victories, with 27. The St. Louis Cardinals, of the NL, are second in Series victories with 11. The Philadelphia/Oakland A’s have 9 and the New York/San Francisco Giants and Boston Red Sox have each won eight. The Brooklyn/Los Angeles Dodgers have earned six titles.
The Stock Market
Oddly enough, a pattern has (sort of) emerged. An academic study compared the performance of the Dow Jones Industrial Average in years following victories by AL or NL teams, for every World Series. This study used the geometric average of gains, a more advanced method of averaging. In the 48 years following a National League victory, the DJIA increased an average of about 8.4%. It increased only about 2.5% in the 65 years following an American League victory. And happy investors will of course remember that for the calendar year 2017, the DJIA raced forward by 25% following the National League-Chicago Cubs’ first World Series victory since 1908.
Considering the World Series history from 1935-2008, another analysis found distinctions in performance in the fourth quarter of the same year of the Series in question. After a National League victory, the S&P 500 gained an average of about 4.2% in the fourth quarter, while an American League victory led to an overall return of about 2.8%. And to underscore this trend, the fourth quarter of 2017 saw the S&P 500 gain an impressive 6.1% after the Cubs won.
Professors & Baseball
In another study in the Journal of Accounting and Finance, five researchers also took on the question of whether the results of the World Series affected the stock market. The researchers examined the S&P 500 results for 1951-2011, excluding 1994 (no Series in 1994). The AL won 33 of the 60 World Series preceding these years, while the NL won 27. The S&P 500 rose, on average, 15.13% after a National League victory and only 10.82% when an American League team won.
Based on their statistical analysis, however, the authors concluded that there was no actual correlation between the victors and the market. Warning investors not to rely on the World Series, they caution that “such anomalous investment strategies are detrimental to creating wealth.” However, it’s still interesting to consider the coincidental relationship, right?
In the 20th century, the DJIA rose an average of 7.5% for all years following the World Series (1904 through 1999, excluding 1905 and 1995). Extending the time frame by another 17 years (1904 through 2017), the DJIA rose an average of 7.8%.
In the years after the Yankees won the World Series, the DJIA grew 8.3%, on average. However, the DJIA rises 12.9% after the Yankees lose the World Series (13 times). So, the market seems to prefer losses by the Bronx Bombers over wins.
Their National League, cross-city rivals have fared even worse, however. The New York Mets have won the World Series twice, in 1969 and 1986. In 1970, the DJIA rose a mediocre 4.8%. And the Mets 1986 victory preceded the stock market crash of 1987, which saw the market plummet by 23%.
Compare this to the Chicago Cubs, a three-time Series winner (1907, 1908 and 2016), whose victories preceded DJIA growth of 46.6%, 15.0% and 25.0% for 1908, 1909 and 2017, respectively.
Following the 11 World Series victories of the St. Louis Cardinals, the DJIA rose 12.4% and the Giants’ first seven victories led to a rise of 10.5%. In the eight years following Red Sox titles, unfortunately, the DJIA grew only 1.1%. This includes large gains after their 1903 and 1918 wins, but also a big loss after their
2007 victory. The years following the Pittsburgh Pirates’ five Series victories saw a mediocre growth of 4.0%.
No World Series
The World Series has been cancelled on two occasions. In 1904, the NL champion New York (now San Francisco) Giants refused to play the AL champions. And then a prolonged players’ strike prevented the 1994 World Series. In 1905 and 1995, the DJIA shot up by 38.2% and 33.5%, respectively. That’s an average of 35.9%. Thus, the DJIA grows dramatically after seasons where there is no World Series. Interesting…
Summary & Conclusion
As these analyses show, the market has surprisingly done better in years after the National League wins the World Series. In addition, it appears that:
- The market does especially well after there is no World Series.
- The DJIA increases more in years after the Yankees lose the Series than in years they win.
- When the Cubs, Cardinals, or Giants win, the DJIA shoots up in the following year.
- After Red Sox, Mets, or Pirates victories, the market grows, but not very much.
Of course, as any introductory statistics class will teach you, correlation is not causation. The World Series outcome doesn’t have any more predictive power than a joke shop crystal ball, but it’s fun to look at. If you’re interesting in learning more about our views on the market, or hearing my 2018 World Series predictions, please don’t hesitate to reach out.
Portions of the above content have been reprinted with permission.
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