The Capitalist Investor - Episode 61

We are proud of the Browns and the Bills. The rust belt old school teams did well this year but sadly didn’t make it all the way. The Super Bowl has come down to the Chiefs vs. the Bucs. Who will win? What are our predictions? What does the Super Bowl Indicator tell us about how the stock market will do in 2021? Listen to this bonus episode of The Capitalist Investor to learn more!

Outline of This Episode

  • [1:40] The Super Bowl Indicator
  • [5:00] The indicator has been wrong 5 years straight
  • [7:07] A better indicator: The equity risk premium
  • [9:06] The 50-day and 200-day moving average
  • [12:18] Our Super Bowl predictions

What is the Super Bowl Indicator?

So the Super Bowl Indicator dictates that if AFC wins (the Chiefs) that the next year (2021) will see a decline in the stock market (bear market). If the NFC wins (Tampa Bay) that foretells a bull market. Does this thing actually work?

This idea rolled out in 1978 when the creator realized this prediction method had been 100% correct up until that year. From 1967–2020 the Super Bowl Indicator was right 40 out of 53 times. That’s around 75%—which is pretty impressive.

The problem with the Super Bowl Indicator

The indicator has been wrong for the last five years. In 2016, the Denver Broncos won and the market was up 12%. It should’ve been down. In 2017, the Patriots beat the Seahawks and the market was up 21.8%. Wrong. In 2018, the Eagles won and the market was down 6.24% that year. The market has done a tremendous job over the last five years.

When the Patriots won in 2017, it was because Russell Wilson threw a last-minute interception. In 2008, the Giants beat the Patriots—which no one saw coming. So maybe, if there’s a crazy end to the game, the indicator is wrong.

The truth is that the stock market doesn’t care if Tom Brady or Patrick Mahomes wins. Brady’s chances of getting to the Super Bowl are 47%, better odds than Steph Curry hitting a three-pointer. That means 47% of the time, Brady is in the Super Bowl. His career after age 35 and on is still the best career that anyone has ever seen. But Mahomes just might be the next GOAT.

The equity risk premium indicator

The equity risk premium is overall a better indicator of stock market performance. What is the equity risk premium? In simple terms, you take the earnings yield on the S&P 500—let’s say it’s 20. So you’d take 100 divided by 20 which gives you an earnings yield of 5. So you take the earnings yield and subtract the yield on the 10-year treasury.

We’re currently around 230–240 basis points. When you’re in the 200–300 basis point range, forward-looking returns over the next 12 months are about 11%. When you drop to the 100–200 spread, forward-looking returns drop to 5%.

This indicator is a measure of the attractiveness of stocks versus bonds. The higher the number, the more attractive stocks are. The more attractive stocks are, the better the future returns are. It isn’t the easiest to understand but had to be thrown in here. What other indicators do we look at to gauge how the stock market might do? Listen to find out!

Getting back to the fundamentals

Market talk is being dominated by Reddit message boards. But we have to mention to everyone that the craziness will sort itself out. It’s what the stock market does. Maybe the old indicators (like PE ratio) will come back into play. How expensive is the stock based on the earnings of the company? 

Don’t always get in on momentum trades because you’re afraid of missing out. Make sure you like the story and the fundamentals. In 2020, you didn’t have to beat your earnings estimates to do well. This year, investors will want to see visibility. It’s time for companies to provide solid guidance. They need to execute because they will be held accountable.

What are our predictions for who will win the Super Bowl? Who is favored? Listen to the episode to find out!

Connect with Derek Gabrielsen

Connect With Mark Tepper

Send your questions and comments to us at info@SWPConnect.com

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Keep Listening to The Capitalist Investor:
Episode 1:
Capitalism vs Socialism
Episode 17:
The Psychological Impact Of This Recession, Ep #17
Episode 33:
Talking With the Man Who Killed Bin Laden, Rob O’Neill, Ep #33
Episode 49:
Even in 2020, There’s Much to Be Thankful for, Ep #49
Episode 3:
Impact of a Bernie Sanders Presidency
Episode 18:
Reducing Fear is the Key to the Rebound, Ep #18
Episode 34:
PPP Recipients Are Being Targeted, Ep #34
Episode 50:
Barstool Pizza Ratings for Stocks, Ep #50