When a World Cup team loses, its country's stock market also goes down. Here's the weird reason why.

By Mark Hulbert

Soccer's premier tournament brings a hidden danger to your investment portfolio

The stock market is no match for the World Cup.

Investors are more pessimistic after their home country loses in the World Cup 'knockout' round.

The World Cup began this week, and investors would do well to watch the event from the stock market's sidelines.

Why should investors care about soccer's premier tournament? Because historically, stocks do poorly during the World Cup - particularly during the elimination (or "knockout") stage. During that stage of the World Cup in 2022, for example, the S&P 500 SPX lost 5.4% and the global stock market lost 4.6%, as judged by the Vanguard Total World Stock ETF VT. Crucially, these losses were registered during a strong bull market, according to the calendar maintained by Ned Davis Research.

Stocks' performance during the 2022 World Cup is just one data point, but it's consistent with the historical record, according to a well-known study that analyzed how sports sentiment impacts the stock market. Entitled "Sports Sentiment and Stock Returns," the study found that, on average during World Cup tournaments from 1973 to 2004, a country's stock market produced a significantly below-average return the day after its team lost in the elimination stage.

You might think that there would be a corresponding positive effect for the stock markets of countries whose teams win an elimination-stage match. If that were the case there would be no net effect on the global stock market from this World Cup effect, since by definition there always is the same number of winning and losing teams.

But the researchers found no evidence of this second, positive effect. Theimplication is that, since there will always be a country whose team has lost, the global stock market should be a below-average performer throughout the World Cup. That is exactly what another academic study found upon measuring the stock market's performance during World Cups between 1950 and 2007: The U.S. stock market produced an average loss of 2.6% during those tournaments.

Some of you may find it hard to believe that a World Cup loss could have such a big impact on something as unrelated as the stock market. But it's consistent with a growing body of research in the behavioral economics field showing how our mood skews our decision-making.

A clear illustration of this behavior comes from one of the most-cited studies in the behavioral economics field. It was based on a survey of American football fans conducted shortly before the 1991 Gulf War.

Following a big college football game, fans were asked whether they thought that a war in Iraq would actually take place and, if so, how many casualties there would be. The researchers found that fans of the losing team thought war was significantly more likely, with greater numbers of casualties, than did fans of the winning team.

World Cup began June 11, with the final scheduled for July 19. The elimination stage begins June 28.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: 6 stocks that could win at the World Cup

Also read: The World Cup could deliver Fox a ratings bonanza: 'There will be all sorts of viewership records'

-Mark Hulbert

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