World Cup Hangover - Part II

I commented yesterday about the post-world cup slump in German stocks, and wanted to go back to other world cups to find out if there was any precedent for such a slump among host nations, and if so, the duration of those slumps. I also wanted to look at the years leading up to the world cup to see if there is evidence of a pre-cup rally as the economy gears up to host. Can we expect a rally in German stocks, and beyond that, is it time to jump into South Africa well ahead of the game to secure some longer-term gains?

I looked at the past 4 world cups (5 nations - Korean and Japanese markets were both included as they were both host nations in 2002) at the market performance of the host country starting with the August after the prior world cup, or roughly 4 years prior to their host cup. This is about the timing they announce the site for the next cup, or at least when people focus on the next nation to host (South Africa already has their world cup website up). Here is the chart:

To say that there are other factors that affected these markets during this time is a gross understatement, but given that these charts cover a span of 16 unique years (1990-2006) and each series is separated by four years (save the Nikkei and Kospi which run concurrently), any clear trends discernable from the data would suggest evidence of a world-cup related effect.

From the apparent chaos some trends emerge - the markets begin to move together in the year prior to the world cup, and continue to do so to an even greater degree after the cup, suggesting there are some world cup related effects on host-country markets. The first three sections (representing 4 years prior through 2 years prior to hosting) aren't very noteworthy and they are left out of the subsequent discussion. No trends, none expected. Too far away from investors minds at that point.
The first year of interest is the year leading up to the hosting of the cup. During this year ( like the three preceding years) 3 markets rose and 2 fell. There are a couple reasons why this year is more interesting than the 3 previous: it is the only year out of all 6 that the Kospi and Nikkei moved in opposite directions, and the only period where the S&P and Nikkei were the only markets to decline. You could make a good case here that the US and Japan would not be significantly affected by hosting the world cup (size of economy, interest in soccer, linkages between US and Japanese economy) and that Germany, France, and South Korea would be a more representative set of countries poised for a world-cup induced rally. All three of these markets rose during the year leading up to the cup. Even more interesting are the post-cup trends. Below is a chart showing the growth from the point the world cup ends:

There is a clear short-term hangover effect in play here following the end of the world cup (except in the S&P, which treaded water through December). When you compare this with yesterday's chart of the DAX, the German hangover to this point appears to be a microcosm of the somewhat longer (2-4 month) hangover experienced by other host nations in the past. Regardless of the extent of the decline, all the host nations I looked at experienced a market bottom within a year of the end of the world cup (even the S&P) followed by a year-long rally. Check out the one-year returns beginning in March following the world cup - an average of 38.5% return for the four markets shown, 42.9% average if you exclude the US. While the specific timing of post-world cup rallies may differ, it seems clear that hosting a world cup is a bullish signal after the market reconciles lofty pre-world cup expectations with post-world cup buyers remorse.