Consistency in Chaos

By Chris Cassidy, CEO

Every year in March and April, millions of sports fans turn their attention to the Men’s and Women’s NCAA Basketball Tournaments. These exciting tournaments feature college teams from all over the country in a thrilling single elimination format. It is expected that a whopping 35 million Americans will fill out a bracket this year.
In fact, so many people spend part of their workday streaming games and checking their brackets that recent estimates suggest that this year’s tournament could cost employers over $13 billion in lost employee productivity. In addition, the American Gaming Association expects 47 million Americans to place bets on NCAA Tournament games.

The NCAA Tournament is often referred to as “March Madness” because of all the upsets (underdogs beating favored teams) and bracket chaos that ensues in the early rounds. Despite these fun early round upsets, the Men’s and Women’s Tournament Champion is almost always a well-known team, from a well-known conference with a high seed (teams are seeded from 1 to 16 with 1 being the highest and 16 being the lowest). In other words, despite the short-term chaos, the ultimate result is much more consistent.

The Men’s NCAA Tournament expanded to its current format of 64 teams in 1985, while the Women’s NCAA Tournament expanded to 64 team in 1994. Since that time, a top 3 seed won the Men’s National Championship about 90% of the time. Furthermore, almost 80% of the Men’s National Champions since 1985 are currently in just three conferences: the Atlantic Coast Conference, the Big East Conference and the Southeastern Conference.

There is even more long-term consistency with the Women’s NCAA Tournament Champion. Since the Women’s NCAA Tournament expanded to 64 teams, a top 3 seed won the National Championship 100% of the time. In fact, a number one seed has won more than 75% of the time. Furthermore, two teams, UConn and Tennessee, have combined to win the national championship approximately 60% of the time.
The stock market is somewhat similar to an NCAA Tournament Bracket. In the short-term, stock market returns can be very inconsistent and large selloffs are not uncommon. In 2008, the S&P 500 plunged more than 35% and during the dot.com collapse of 2000-2002, the market posted negative returns for three straight years, including a more than 20% decline in 2002. More recently, in February/March of 2020, the S&P 500 lost one third of its value in just 4 weeks.

Despite this shorter-term chaos, long-term equity market returns have been surprisingly consistent. Over the past twenty years, ending 2020, geometric average annual returns for the S&P 500 have been roughly 7.5%. Over the last 50 years S&P 500 annual returns have been roughly 10.5%. Going all the way back to 1928, S&P 500 annual returns have been approximately 10%. While it is not uncommon for equity markets to decline 10-20% in value in a given year, longterm returns have historically been remarkably consistent.

Although upsets are fun to pick when filling out a bracket, my advice is to stick with the top seeds when picking a national champion. Although financial markets can be very chaotic and unpredictable in the short-term, my advice is the focus on long-term returns.