University of Waterloo pofessors Seda Oz and Steve Fortin examined data from 1997 to 2019 and found box office earnings – an early sign of superfluous spending – could foretell if the S&P 500 index would dip or swing for up to five days.Rafal Gerszak/The Globe and Mail
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Move over so-called hemline, Big Mac, Super Bowl and lipstick indexes. There’s a new oddball economic indicator coming to a portfolio near you – daily box office earnings.
Should advisors and portfolio managers pass the popcorn – or take a hard pass?
This one might be worth a look. According to a new University of Waterloo study, the amount of money U.S. theatregoers spend on tickets to see the latest flicks can predict stock market returns accurately in the short term.
Professors Seda Oz and Steve Fortin examined data from 1997 to 2019 and found box office earnings – an early sign of superfluous spending – could foretell if the S&P 500 index would dip or swing for up to five days.
Ms. Oz’s Eureka moment – to use ticket sales as a daily consumption variable – came to her while walking past a movie theatre in Montreal a few years ago.
“These tickets are not that cheap,” she says. “When you have a family of four, you’re spending a lot of money on them, so we figured this is non-essential spending.”
Consumer confidence and spending patterns are important. When people begin tightening the purse strings and holding back on non-discretionary spending, that’s a warning sign of poor economic growth and perhaps even a recessionary drop in the future. Consumer confidence acts as a forward indicator of weak equity markets or worse.
However, what sets this new box-office data apart from other traditional indicators is measurement frequency. Usually, investors use quarterly or monthly data to predict stock market performance. But box office earnings offer timelier information to create trading strategies.
“Companies release financial statements on a quarterly basis, but when it comes to stock markets, everything happens in a minute. One moment, you wake up and things are good; by afternoon, things are just down the toilet,” says Ms. Oz, explaining she believes it’s the first time daily consumption data has been measured against stock market movement quantitatively.
Of course, there are other unusual economic indicators meant to explain where the market is headed, although some are more informative than others.
The lighthearted The Big Mac index was created by The Economist in 1986 to use the ubiquitous hamburger’s cost around the world as a way to gauge whether a currency is over or undervalued.
Meanwhile the men’s underwear index, a theory once championed by Alan Greenspan, supposedly reveals when men aren’t buying new underwear, rocky markets are on the way. (And solidifies what their mortified partners have known all along: Men think of underwear as discretionary spending.)
The Hemline index is possibly the most famous dubious indicator of all. The shorter the skirt, the healthier the economy.
‘There’s probably some truth in it along the way’
Izet Elmazi, chief investment officer at Bristol Gate Capital Partners Inc. in Toronto, likes the Canadian sports team “pain/gain” indicator. According to the theory, whenever Canadian teams complain about the difficulty of signing players and competing financially against their U.S. counterparts, that’s a pretty good indication the Canadian dollar is to blame.
“When we lost the Winnipeg Jets and the Quebec Nordiques, the [Canadian] dollar was at US70¢ to US75¢ – and we got Ottawa when the dollar was at par,” he says. “But it’s nothing I use formally. It makes for an interesting story and a good laugh.”
Laughs aside, what would he tell clients if they came to him wanting to use an alternate indicator to make decisions about their portfolio? The same as when they come armed with the latest headline or tip from a friend – validate, then discuss the big picture.
“I always say, ‘That’s interesting, and with everything, there’s probably some truth in it along the way.’ They’re interesting anecdotes, but you have to be careful about spurious correlations at times,” Mr. Elmazi says.
“It’s important to take a step back and say, ‘Can I rely on this as an effective signal or just something I came across by chance?’” he adds.
For instance, in the case of troubled sports teams, other factors could be at play, from salary caps to broadcasting contracts and revenue sharing.
Mr. Elmazi prefers to guide clients back to first principles and timeless investment strategies – finding high-quality, high-dividend growth companies bought at fair prices.
“And you don’t have to look at the lipstick index – although Estée Lauder is a great company and beauty is a fantastic business!” he jokes. “I’ve never heard anybody say, ‘I want to look old.’”
‘No substitute’ for a solid financial foundation
Meanwhile, Andy Kovacs, certified financial planner with Sun Life Financial Investment Services (Canada) Inc. and president of Andy Kovacs Insurance and Financial Solutions Inc. in Markham, Ont., has a favourite weird indicator – cigarette butts. If they’re smoked down to the filter, tough times are on their way.
“I don’t know if there’s any truth to it, but it seems plausible and makes for an interesting story,” he says. “But as I tell my clients, there’s no substitute for a solid financial foundation regardless of which way the markets are going.”
Not that he would have to do much convincing. An indicator is only one data point and there are so many other things to consider when building or updating a portfolio.
“I find most people aren’t willing to change course based on a popcorn or cigarette index,” he says.
While Ms. Oz stands behind her research and encourages investors to follow box office earnings to help guide short-term decisions, she issues an important disclaimer.
“Because we’re using this at an aggregate level, nobody should ditch their firm-specific information just because box office earnings are going up,” she says. “A fundamentally horrible company is not going to do well no matter what.”
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