I know I am not the only one that is thrilled for the return of football season. College football kicked off in full force this past weekend. I spent a chunk of my weekend moving furniture and painting as we shuffle our kids’ bedrooms in preparation for baby #3 later this fall. At the expense of my overall efficiency, all the work was done with a football game on in the background. The NFL season kicks off tomorrow night before a full slate of games on Sunday afternoon. Few things are as difficult to predict in the short-term as the stock market. The NFL standings may be one of them. Let’s explore more.
In 2002 the NFL realigned their divisions to create 4 teams across 8 divisions. Since that time 27 teams, an average of 1.35 per year, have gone from last in the division to first in just one season. We saw this most recently when the Cincinnati Bengals (WHO DEY!) went from a last place 4-11 record in 2020, to a first-place finish and trip to the Super Bowl in 2021. This parity is not by accident. The NFL has an unbalanced schedule which pits first place teams from the prior year against each other the following year. The same is done for last place finishers, meaning the worst teams in each season have the easiest schedules the following season. The schedule, combined with other factors like salary caps, free agency and the draft provide plenty of opportunity for underperforming teams to close the gap. It’s rare for a single franchise to go a long period without enjoying some degree of success. Of course, there are always exceptions, such as the Cleveland Browns who have never won the AFC North Division (Ha Ha!) The unpredictability of the NFL from season to season is a big part of what makes it so much fun to watch.
If we turn our attention to the stock market, we can draw some interesting comparisons. Countless factors are constantly being priced into the value of each individual company and the overall market. Prices change based on everything from company earnings and growth projections to geopolitical events, monetary and fiscal policy, and macro-economic conditions. As these things get priced in, it can make for a wild ride.
Consider the charts below as an example. The first chart looks at the 2020 return of two companies that were among market leaders during the COVID pandemic. Zoom finished 2020 up 395.8% and was up almost 750% at its peak. Peloton reached a peak over 450% and finished 2020 up 434.2%. However, those returns were short lived. The second chart shows that these two companies are now trading 85% and 93%, respectively, below their all-time highs. Like the NFL, albeit in reverse in this case, it’s not uncommon to see massive swings of fortune for publicly traded companies.
Even over much longer periods of time we eventually see turnover at the top. The New England Patriots won their division 16 out of 17 years from 2003-2019. Then Tom Brady left for Tampa Bay. For now, the Buffalo Bills have replaced them as the class of the division and are heavily favored to win the AFC East for a third straight season. The chart below shows the ten largest companies in the US Stock market at the beginning of each decade. You can follow the color-coded dots across each decade to see that even the biggest names don’t stay among the largest companies forever. Facebook, now META, started the 2020s as the 6th largest company. It’s currently trading down over 56% from its all-time high.
Source: Dimensional, using data from CRSP and Compustat. Includes all US common stocks. Largest stocks identified at the end of the calendar year preceding the respective decade by sorting eligible US stocks on market capitalization using data provided by the Center for Research in Security Prices, University of Chicago.
If you’re a fan of the NFL, you likely have one favorite team that you live and die with week to week and season to season. Fortunately, as investors we can fully diversify our portfolio across various asset classes and companies. This limits volatility and allows you to enjoy the benefits of long-term appreciation.
So which NFL team is most likely to go from last to first in 2022? According to the experts in Las Vegas, that would be my favorite team, The Baltimore Ravens. Following an injury to star quarterback Lamar Jackson, they lost the final 6 games of the 2021 season and finished last in the division with a record of 8 wins against 9 losses. The return of a healthy Jackson and the aforementioned “last place” schedule have them positioned as the favorites to win the AFC North in 2022. Sorry to all the Bengals, Steelers and Browns fans out there but, Go Ravens!