The Stock Market Loves The Olympics

By Tim Parker | August 10, 2012 AAA
The Stock Market Loves The Olympics

A good investor will look for ways to profit from just about anything. Whether it's a presidential election, a surprise earnings announcement, Wall Street-friendly legislation or even the Olympics, if there's money to be made, investors and traders will find it. The Olympics have been on for nearly two weeks and that's exactly what investors are doing: they're looking for the hidden profits in the world's most celebrated sporting event, but other than investing in specific companies that are connected to the games, are there other places to generate alpha?

SEE: Olympic Economics

According to Bespoke Investment Group, there may be plenty of opportunities and some may have no connection to the Olympics. Bespoke looked at the performance of the Dow Jones Industrial Average during each of the Summer Olympic Games back to 1900. During that period there were 26 Summer Olympic Games with three canceled due to world wars. They found that the average rate of return of the DJIA was an impressive 4% from the opening to closing ceremonies, with positive returns 68% of the time. Below is a table illustrating the performance of the index in the past hundred years.

Year Host DJIA % Change
1900 Paris, France 5.13
1904 St. Louis, USA 41.74
1908 London, UK 18.80
1912 Stockholm, Sweden 0.17
1916 Berlin, Germany (Canceled) N/A
1920 Antwerp, Belgium -11.56
1924 Paris, France 8.64
1928 Amsterdam, Netherlands -0.35
1932 Los Angeles, USA 17.11
1936 Berlin, Germany 0.54
1940 Helsinki, Finland (Canceled) N/A
1944 London, UK (Canceled) N/A
1948 London, UK -2.15
1952 Helsinki, Finland 2.15
1956 Melbourne, Australia 5.74
1960 Rome, Italy -3.62
1964 Tokyo, Japan -0.12
1968 Mexico City, Mexico 1.23
1972 Munich, West Germany 0.20
1976 Montreal, Canada -0.86
1980 Moscow, Soviet Union 0.81
1984 Los Angeles, USA 9.28
1988 Seoul, South Korea 0.70
1992 Barcelona, Spain 1.41
1996 Atlanta, USA 4.66
2000 Sydney, Australia -2.53
2004 Athens, Greece 3.76
2008 Beijing, China -0.91
2012 London, UK ~ 2.48%
Source: Bespoke Investment Group

Some of the more notable years were the 1904 Games hosted in St. Louis that saw a 41% gain. Other double-digit gains included the 1908, 1920 and 1932 Games. In more recent years, during the last seven Summer Games, the DJIA has seen positive returns five of the seven years and during 2008, when the market was under severe pressure from the start of the subprime mortgage crisis, the markets were down only .91%.

The Host Country
Since 1984, host countries have generally seen a rise in their markets largely in line with the performance of American markets. One exception was the 2000 Games hosted in Sydney, Australia, when the DJIA was down 2.53% but the Australian market was down only 0.93%. The other notable exception was the Beijing Games in 2008 where the Dow lost 0.91% but the Shanghai Composite lost a staggering 7.69%. That is equal to nearly 1,000 Dow points at current levels.

Bespoke's report shows that stock markets react favorably to Summer Olympic Games and although the host country has to invest a lot of money into hosting the games, their markets tend to reward them.

SEE: The Most Costly Olympic Games

The Games Have Changed
With the exception of the 1912 Games, which were two weeks long, it wasn't until 1928 that the Olympic Games went to a two week format, permanently. The impressive 41% gain in the market during the 1904 Games covered a much longer period. The opening ceremonies of these games began on July 1, 1904, with the closing ceremonies taking place on November 23, 1904. If we look at the performance of the games that lasted only two weeks, the average gain was a much less impressive 1.86%.

The 21st century games are even less impressive. In the three Summer Games of the century so far, the DJIA has seen gains only one time and although the average gain is still positive, it's only by 0.10%. Most investors would consider this a flat or breakeven performance.

The Bottom Line
History reveals that during the Summer Olympic Games, markets gain a sense of optimism in most years, even shrugging off some of the negatives that might be holding it back.

How can traders use this information? They may consider positions not only in the overall market, but also in companies like Nike, which should gain additional revenue from the exposure it's receiving at the world's largest sporting event. Longer-term traders without a portfolio designed for short-term profits should watch and enjoy the games, but not adjust their portfolios to try and capture short-term profits that are far less than assured.

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