The Super Bowl Indicator
This week was no different than those that preceded it this year. We’re still in a storm of volatility, fear, and uncertainty. Today we learned that Russia’s invasion of Ukraine may be imminent and yesterday we learned inflation continues to rise unabated. Crude oil spiked and the 10-yr Treasury rose above 2% well ahead of schedule. We have a bit further to go before the markets regain solid footing and investors find confidence once more.
Inflation continues to be a thorn in the side of both investors and consumers. While it didn’t come as a surprise, it was still disheartening to learn that the Consumer Price Index (CPI) rose to 7.5% in January. Also disheartening is that inflation rose most in the categories we all typically consume, i.e. food, electricity, and housing. Even Core CPI, which excludes food and energy, grew by 6%. The continued pressure on prices could prompt the Federal Reserve to take stronger actions in controlling inflation. With the first rate hike coming next month, analysts are now talking about a 0.50% interest rate hike versus the previously expected 0.25%. Both Bank of America and Goldman Sachs now expect seven rate hikes this year. In hindsight, it is now clear the Federal Reserve is behind in both its thinking and its policy.
Perhaps equally of importance, consumer sentiment dropped to a decade-low as inflation expectations rose. The recent declines have been driven by weakening personal financial prospects, largely due to rising inflation, less confidence in the government’s economic policies, and a worsening long term economic outlook. One economist said, “the recent declines signal the onset of a downturn in consumer spending.” And yet, U.S household debt rose by 2.2% to $15.58 trillion in Q4, with overall debt for the year marking its largest increase, on a nominal basis, since before the 2008 financial crisis, the Federal Reserve Bank of New York said in its report. Mortgage balances rose by $258B in Q4, standing at $10.93T at the end of the year. Credit balances rose $52B, the largest quarterly increase in the New York Fed’s 22 years of data.
Perhaps the silver lining is found in the inflation data and falling consumer sentiment. As inflation eats into disposable income and consumer sentiment sours, we could see spending fall. Ordinarily this would not be a desirable outcome and economists would lament the situation. But consider the effect reduced consumption could have on inflation. For example, U.S. home price appreciation was off the charts last year. The monthly principal and interest payments required to buy the average-priced home with 20% down rose by 32% since the same time last year. Additionally, mortgage rates have risen above where they were at the start of the pandemic and are expected to continue to rise due to both the strong labor market and high inflation, which could have an adverse impact on homebuyer demand. What I’m trying to say is the flame may burn out of its own accord. This may take a bit more time but eventually, less spending will mean moderating prices.
In closing, I want to draw your attention to the Super Bowl this weekend. The Cincinnati Bengals are making their first appearance in 33 years. As our hometown favorite, we wish this team all the best on its road to victory. However, I am a bit conflicted. The Super Bowl Indicator, which was first introduced in 1978, posits that if a team from the National Football Conference (NFC) wins the Super Bowl, the stock market will rise in the coming year. Vice Versa, if a team from the American Football Conference (AFC) wins, it foretells a decline in the stock market for the coming year. However, correlation does not imply causation and while this indicator has some success prior to 2001, it is no longer as accurate as it once was. Having said that it still has a success rate of 74% as of 2021. The conundrum is the Bengals are in the AFC. I’ll let you decide which you value more, a Bengals win or a rising stock market. It’s not so easy, is it? Either way I’ll be watching it this Sunday and I hope you do too. Now you know.
Bruce J. Mason, MBA