Opinion: Trading stocks during ‘March Madness’ is no slam dunk and the reason may surprise you


You might want to avoid trading stocks during this year’s NCAA Men’s Basketball “March Madness” Tournament, which started earlier this week and lasts until April 4. That’s because researchers have found that during widely watched sporting events, enough investors act irrationally that the market performs below average.

The study that documented this pattern appeared a few years ago in the Journal of Finance. Entitled “Sports Sentiment and Stock Returns”, its authors are finance professors Alex Edmans of the London Business School, Diego Garcia of the University of Colorado at Boulder and Oyvind Norli of the BI Norwegian Business School.

Although the researchers mainly focused on World Cup football matches, they also studied cricket, rugby and basketball tournaments. They found that a country’s stock market performed significantly below average following the losses of its national team in international competitions.

One would think that these negative effects of the losses would be canceled out by a corresponding positive stock market impact in the countries whose teams were victorious. But the researchers found no such evidence, likely because a win simply means a country’s team continues in the competition while a loss means the country is eliminated altogether. As a result, fans of losing teams will likely be more discouraged than fans of winning teams will be thrilled.

This asymmetry between winning and losing weakens the global stock market when a widely watched sporting match like the World Cup takes place. This general impact was confirmed by another academic study, this one by Guy Kaplanski of Bar-Ilan University in Israel and Haim Levy of the Hebrew University of Jerusalem. They found that global equity markets experience below-average returns during the World Cup.

None of these studies focused on the March Madness tournament. But the same psychological forces are likely entrenched in people regardless, and if so, there should be above-average selling pressure in the US stock market through early April.

To be sure, no group of researchers behind these studies recommends that you should turn completely to money in major sports competitions. The magnitude of the stock market’s below-average performance in these competitions is not enough to overcome transaction costs, especially considering taxes. Additionally, their findings reflect an average over hundreds of games, and there is no guarantee that the market over the course of a competition will actually be a below-average performer.

Consider the Nasdaq Composite COMP,
performance during all March Madness competitions since 2000. I calculate that his average return was 0.35%, compared to an average gain of 0.48% over all three-week periods over the past two decades. It’s hard to imagine how you could leverage that difference into much profit, however statistically significant.

emotions matter

But that is not the purpose of these research studies. The broader implication of the research is to remind us, again, how difficult it is to keep our emotions from influencing our investment decisions. It wouldn’t even have occurred to us that while we may be depressed after our favorite team’s losses, our discouragement could affect which stocks we think are worth buying or selling.

But it could very well. In fact, the behavioral finance literature is replete with such examples. I will mention just one that is relevant for this week: Researchers have found that stock market returns around the world tend to be below average on the Monday following daylight saving time. The likely cause, the researchers say, is that these Mondays we are “weighed down with weariness, battling lethargy and perhaps even dealing with despondency.”

Last Monday was the day after this year’s daylight saving time, and the S&P 500 fell 0.7%.

Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be reached at [email protected]

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