Streetwise for Friday, February 1, 2019

The rampant discourse over the world’s economic future must wait. There are more important forecasts to consider as fractious factions face off tomorrow, February 2, Groundhog Day, over who has the superior groundhog. OK, I know I write about this event every year, but I think it adds some light heartedness to the somberness of investment analysis in today’s world.

Peacefully sleeping members of Marmota monax are yanked out of their comfortable dens on this date to view their shadows, the purpose being to predict the weather six weeks into the future.

According to legend, if Punxsutawney Phil, for example, sees his shadow, we can look forward to six more weeks of winter. If he does not an early spring is forecast.

How accurate is Phil? In short, not very. Phil has been accurate only 39 percent of the time since the first Groundhog Day in 1887, according to StormFax.com. Although there has only been one Phil for the last 131 years, he has become slightly more accurate, with a 46 percent success rate since 1988.

However, 2017 was a disaster. Phil saw his shadow and what followed was the second-warmest February on record in the Lower 48 states, the ninth-warmest March and the 11th-warmest April.

Phil has also been exceptionally wrong about St. Petersburg, Florida, where shadow years, on average, were 13.9 degrees warmer than non-shadow years.

And let’s not forget the competition. General Beauregard Lee of Georgia, who holds “honorary doctorates” from the University of Georgia and Georgia State in “Weather Prognostication,” and who in turn competes with Sir Walter Wally of North Carolina.

The University of Georgia tersely informed me several years ago by letter that academic recognition of such magnitude would not have been bestowed on a groundhog. I did not mean to imply that Beauregard had really been awarded such a degree. After all, he never actually put it on his Curriculum Vitae.

Desirous of taking advantage of the ground swell of groundhog controversy but with no groundhog of its own to roust, Florida at one time devised an ad campaign indicating that Punxsutawney Phil had exited stage right in search of warmer digs.

After all, the recent weather up north would have sent any enterprising ground hog southbound. Phil’s handlers were not amused; muttering something about, “trademark violation” and the promotion died an early death, unlike 131-year-old Punxsutawney Phil.

Given the expertise groundhogs have with the English language, not to mention meteorology, we can excuse the fact that their forecasting approach leaves a bit to be desired. Unfortunately, many of Wall Street’s prognosticators are in the same league as a groundhog.

There a widespread belief that the Super Bowl can foretell the stock market’s future. According to the lore, a triumphant team from the old American Football League (now the American Football Conference, or AFC) foreshadows a down market, but a winner from the old NFL (now the National Football Conference, or NFC) means the bulls will rule the roost.

This theory was first introduced in 1978 by Leonard Koppett, a sportswriter for the New York Times. In the past 10 years, the Super Bowl Indicator has been about as accurate as a coin-toss. 

However, it does raise a valid observation that correlation is not causation. A football game will not determine the performance of the market. And using it as such to predict market performance or worse, to make investment decisions is problematic at best.

Yes, there is also a modicum of statistical data that correlates market aberrations with certain calendar events. For example, the so-called January effect, where January stock prices supposedly forecast the markets performance for the remaining months of the year. 

Before you start placing buy orders, consider that 20 years ago David Leinweber, a visiting economist at Caltech, determined that butter production in Bangladesh had a statistically significant correlation with the S&P 500 index. He is still asked for current butter production numbers. Again, correlation is not causation.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.