Stocks are likely to struggle during March Madness


Aaron Harrison of the top-ranked Kentucky Wildcats goes for a basket.

Because March Madness begins next week, you might want to stay out of the stock market until it ends April 6.

Come again? What does the NCAA men’s college basketball championship have to do with the stock market?

More than you think: Believe it or not, stocks more often than not produce below-average returns during widely followed sports tournaments.

Last year’s March Madness was a case in point. Despite an overall positive year for equities, the S&P 500 fell 1.5% between the opening round of the 2014 NCAA championship and the final game.

A rigorous study that appeared in the August 2007 issue of the prestigious Journal of Finance suggests that last year’s experience was not a fluke. The study, “Sports Sentiment and Stock Returns,” was conducted by finance professors Alex Edmans of the London Business School and the University of Pennsylvania’s Wharton School; Diego Garcia of the University of North Carolina (Chapel Hill); and Oyvind Norli of the Norwegian School of Management.

The authors measured what happens to a given country’s stock market immediately following losses of its national teams in international competition. They focused primarily on soccer matches in the World Cup, but they also studied cricket, rugby and basketball. They found that, if a country’s team lost, its stock market the next day suffered a significant diminution in return.

As the researchers were unable to find any rational explanation for the result, they concluded that the diminished returns were caused by the “impact of sports results on investor mood.”

You might wonder what their study has to do with March Madness, since only U.S.-based teams are playing. For each team that loses, another one wins, of course, and investors in the winning team’s region will presumably be as exuberant as fans of the losing team will be despondent. Won’t their moods cancel each other out, leaving no net impact?

No. The researchers found little evidence of a correspondingly positive effect on a country’s stock market when its team won. The consequence of this asymmetry is that stocks will often experience below-average returns whenever large groups of investors become discouraged, even when the dampening of their spirits has nothing to do with investing per se.

By the way, the non-sports fanatics among you shouldn’t become too holier than thou because of the lunacy of sports hysteria.The relationship between the stock market and investor mood extends well beyond sports.

Just take the move to Daylight Saving Time, which took place this past weekend. Another academic study, which appeared in the September 2000 issue of the American Economic Review, found that the stock market’s returns are significantly below normal, on average, following shifts to Daylight Saving Time. To explain those results, the authors theorized: “We have all struggled through a day after a poor night’s sleep, weighed down by weariness, fighting lethargy and perhaps even facing despondency.”

The bottom line: Take some (money) chips off the table for the next couple of weeks, and replace them with some (corn) chips while you watch the tournament.