Blog : Stocks and the Super Bowl

by Ed Zwirn on February 1st, 2014

The hard realities of life sometimes have a way of being softened by distraction. Bearing this in mind, Sunday's 48th Super Bowl, which pits the Denver Broncos against the Seattle Seahawks, could not have come at a better time.

As of this writing, the betting line for this contest is wide open, with no clear favorite having emerged between the two teams. This, along with speculation over halftime ceremonies and previews of the latest ads, should generate enough buzz around the event, and propel beer and chip sales.

But while the Super Bowl is one of those many opportunities enjoyed by Americans to turn inward and not worry about the rest of the world, at least for one weekend, the temptation to really tie one on this time around is understandable.

There is plenty to forget: As the numbers come in for last year, it is evident that although the economy grew in 2013, this growth was muted, with the rate of GDP growth actually slowing down. And, whatever comes next, January 2014 will go down as one of those months that investors would rather forget.

After soaring to all-time highs late last year, the market for everything from penny stocks to blue chip shares has taken a dive so far this year. Larger companies fared the worst, with the Dow Jones Industrial Average closing Jan. 31 at 15,698.85, down 5.3% on the month. The broader market, while it didn't score as badly, also lost ground, with the NASDAQ Composite off 1.7% so far this year and the small-cap Russell 2000 off 2.8%.

The major stock market indices in the U.S. got off to a skittish start at the beginning of the year, which is to be expected following last year's spectacular performance. But this skittishness turned into a rout last week, as concern rose about the Fed's tapering and its effect upon emerging markets.

Emerging markets had already been enduring a prolonged flight of capital, both because of serious problems in individual emerging countries and the prospect of Fed tightening. This flight has accelerated since the Jan. 23 release of a report which pointed toward a contraction in China.

The latest debacle has proved a textbook illustration of the difficult position in which the Fed finds itself. According to every reliable measure, quantitative easing, which last year pumped over $1 trillion into the economy, has both boosted the U.S. economy and propelled the U.S. stock market to its recent heights.

But the reach of U.S monetary policy extends far beyond that. As noted previously in this penny stock blog, the availability of all this money, coupled with historically low interest rates, has boosted more speculative investments in particular.

With investors hungry for yield, much of this money had moved into penny stocks. At the same time, emerging markets stocks had been reaping in the proceeds, at least until recently.

That these speculative investments would run into trouble as soon as these proceeds were reduced was a fact apparently lost on no one who witnessed the recent market decline. The Fed may in fact have pulled the rug out from under itself by sticking to its guns and announcing a further $10 billion tapering last week. Despite all the talk of this action having already been priced into the market, the dive taken by the U.S. stock market last week showed the extent to which the U.S. central bank needs to worry about propping up both foreign and domestic markets.

But, like it or not, the distinction between foreign and domestic is becoming a spurious one. In one sense, this is the logical outgrowth of the foreign policy developments of the past 50 years. The suffering caused by China's so-called Great Leap Forward may have grabbed some news coverage, but it was totally irrelevant to Wall Street. The expansion of capitalism worldwide since then should be viewed as a welcome development, but at the same time it has widened the areas of the world to which committed capitalists must pay attention.

It was a very different world when the first Super Bowl was held.  Super Bowl I was played on January 15, 1967, at a time when Americans were busy learning geography because of the Vietnam War. It goes without saying that wars have killed many people since then, and all indications are that this will continue to be the case for some time.

But our foreign worries have also become more nuanced since then. Massive real estate fraud in the U.S. brought down world financial markets a few years ago. Now it looks as if the world may be biting back.

Or maybe it would be better to call the stock market performance an interception, given the advent of Super Bowl XLVIII. I for one am betting all my salsa and chips that we are in store for more suspense ahead, both on and off the field, depending in part on whether stocks score another field goal, lose the ball or commit a wardrobe malfunction.