The Olympics are over for another four years. What an amazing spectacle and didn’t Team GB do well? Even a total Bah Humbug like me who expected a national disaster complete with traffic chaos and disappointment in the medal targets couldn’t help but be carried away with the mood and the media coverage.
There has been much talk about the Olympic legacy on the economy and society as a whole including rejuvenation and a resurgence in sporting activity but will there be an Olympic effect be on investment markets?
I predict that the remainder of 2012 will be an excellent year for stock markets in the UK and US though probably a bit of a disaster in France, Germany and Australia. Why do I say this?
Is it because of a major change in economic fundamentals?
Has the credit crunch abruptly ended leaving banks across the world fully capitalised and ready to lend to small businesses which will stimulate economic growth?
Have the problems of the Eurozone miraculously all been sorted when we weren’t looking because we were too busy watching Team GB collect a record haul of Gold Medals?
I have no strong opinion on any of these issues; only time will tell. However, there is a body of academic research that suggests stock markets perform well immediately after national success in major sporting events such as the World Cup. They don’t get much more major than a home Olympics and the success has been amazing. Therefore, a brilliant end to the year for investors must be assured.
Unfortunately, like with Olympic medal hopes, this prediction doesn’t always work. Maybe the success of the FTSE won’t be linked to Team GB overall but to some subset of the team such as Swimming; in which case we might need to batten down the hatches for a rocky ride as the market slumps yet again.
There is another problem with this type of prediction; in order to benefit you need to know in advance whether the national team are going to win or lose. The evidence shows that the negative performance of markets after a sporting defeat is even more pronounced than the upswing after victory. Predicting the outcome of sporting events is no easier than forecasting on investment markets. When a win seems a sure thing the odds, which determine the return on your bet, are generally very poor. That’s why book makers make money even when their clients are losing their shirts. Actually that doesn’t sound too different from much of the investment industry when you think about it!
It is also worth pointing out that there plenty of other crazy theories that claim to be able to predict the future of stock markets including my own personal favourite – The Hemline Indicator (sometimes referred to as the Bull Markets and Bare Knees theory). This suggests that the length of the hemline on women’s dresses predicts the future direction on stock markets. In years where hemlines are short markets are supposed to go up and the more flesh on show the better the performance. Hey I’ve just realised, it’s going to be a better year for markets than I had expected. It won’t be Angela Merkel and Francois Hollande that save Europe but the Olympic Beach Volleyball!
This is clearly complete nonsense but people do actually tout investment strategies based on this kind of junk. That’s why we need to ignore the news and the short term ups and downs of unpredictable investments and maintain the discipline to stick to a diversified long term investment strategy.
Now I’m off to analyse Team GB’s form for the Paralympics and see how this might affect my investment strategy……..