World Cup Indicator: Boon Or Bane?

Will the World Cup games, which opened yesterday, portend of a bullish or bearish markets for the coming months?

Frank Holmes of US Global Investors argues that this should be bullish, especially from the perspective of the host country, i.e. South Africa...


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But Bespoke Invest sees the historical correlation as "negative"....

According to Bespoke, "both the US and world markets have averaged declines over both periods throughout history. The S&P 500 has averaged a decline of 1.65% during all 18 prior World Cups, and a decline of 0.37% in the three months following. The MSCI World Index, which we only have back to the 1970 World Cup, has averaged a decline of 1.25% during and 4.34% over the following three months. Historically the market has averaged gains over one- and three-month periods, so indices have definitely underperformed during World Cups. Most fans of the sport would take a couple months of declines in the market if it meant their country would win, however."

To my mind, historical patterns are not reliable measures in assessing market prospects because they can be positive and negative depending on the prevailing market and economic conditions then.

Instead, these indicators appeal to people who are only looking for patterns either to confirm their biases or to rationalize market actions.

Besides, major sporting events as the World Cup or the Olympics can only give a temporary boost to the economy. But on a larger picture such events could entail greater costs from the crowding out effect from inefficient government spending relative to private sector investments. In short, gains can be "exaggerated".

As Leander Schaerlaeckens at the ESPN writes, (bold highlights mine)

``People who are excited about hosting a World Cup, write Szymanski and Simon Kuper in "Soccernomics," "are merely expressing in extreme form a conventional belief: that hosting a big sports event can make a place rich."

``In truth, write the authors, while World Cups don't produce much monetary gain, they have been shown in several studies to be good for general happiness among the hosting population and a country's self-esteem. Thabo Mbeki, South Africa's president until September 2008, declared in a speech that the tournament would be "sending ripples of confidence from the Cape to Cairo." It doesn't look bad for a politician looking to get re-elected, either.

"FIFA and the Olympics all enjoy monopoly standings," Baade said. "And that permits them to foist enormous economic cost on those that compete for mega-events like the World Cup. They're in a position to expropriate public funds. The argument is made that we're going to bring in so many non-native spendthrifts that that will offset the expense of stadiums, but there's very little evidence to support that."

``Chances are that like many predecessors South Africa will eventually discover that hosting the World Cup was a poor choice, at least from a financial viewpoint. But by then, FIFA will have moved on to flattering some other country into believing it should pour the money it doesn't have into hosting another glorious edition of the World Cup."

As always, the temporal 'self-esteem' gains are skewed mostly towards grandstanding politicians. And at the end of the day, if revenues expected are not fulfilled, then the carrying costs of the 'country's self-esteem' will eventually be borne by the taxpayers.

In the Philippines, this is called the fiesta mentality.