As fans around the world gear up for the soccer event of the season, a quick look into past shows the World Cup as being among a handful of factors that influence equity markets.
History has shown a few re-occurring trends: volumes in world equity markets decline during the competition, volatility measured by the VIX (Volatility Index) increases and equity market indexes decline during the first half of the competition before increasing in the second half.
The decline in equity market volumes during the competition can be directly attributed to greater attention to the events, particularly when key matches take place at the same time that North American equity markets are open.
The increase in the VIX Index can also be attributed to the competition, as equity markets are more sensitive to unexpected events when trading volumes are lower than average.
Data for the past 81 years shows that during World cup years, the Dow Jones Industrial Average declined an average of 2 per cent from the second week of June to the end of June, followed by a recovery of most of the decline by mid-July.
However, the impact on equity market indices can also be partially attributed to other recurring events that happen at the same time. World Cup competitions are held on U.S. mid-term election years, when political rhetoric in the U.S. begins to ramp up.
Rhetoric related to the U.S. mid-term election ramped up last weekend when several political attack ads appeared on television for the first time. Negative politics often lead to political and economic uncertainties - uncertainties that equity markets do not respond well to.
Equity markets also respond during the period in anticipation of second quarter results. The “quiet period” for guidance from most major companies occurs in the second half of June. This two week period is also known as the “confession” period, when companies that have failed to reach consensus revenue and earnings projections provide pre-emptive guidance.
The period of anticipation ahead of second quarter results also occurs around this time, from the last two trading days in June until five market days following U.S. Independence Day on July 4. On average since 1950, the S&P 500 Index has gained 0.9 per cent during the U.S. independence holiday trade and has been profitable 72 per cent of the time. During World Cup years, U.S. independence holiday trade has been profitable in 11 of the past 15 periods.
This year, volumes on North American equity markets already are significantly lower than last year and will likely remain low during the World Cup. The volatility index will likely increase during the competition, partially because it is already low and technically oversold. The index reached a seven-year low at the end of last week, and North American equity market indices are currently at or nearly at all-time highs, in addition to being technically overbought and vulnerable to surprise negative news until the end of June.
Investment during this year’s World Cup event will depend on individual preference, though the preferred strategy for most investors is to relax on the sidelines and enjoy the games.
Opportunities for traders to take advantage of higher volatility could arrive by late June, particularly if the VIX and its related ETFs recover from oversold levels. U.S. exchanges list 15 Exchange-Traded Products that trade on volatility of U.S. equity indices. The most actively-traded product is iPath S&P 500 Short Term Future ETN (VXX US$30.21). Horizons offers a comparable product in Canada that trades in Canadian Dollars: BetaPro S&P 500 VIX Short Term Futures ETF (HUV $4.17).
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