While everyone is enthused about the first winter World Cup, the stock market has gone into hibernation.
It isn't easy to define what is the World Cup Effect exactly. It is not a term that has been recorded in authorized dictionaries. It is no more than a playful name for the seemingly common phenomenon that appears over the stock market across the globe whenever the FIFA World Cup kicks off. Its function differs from other solemn economic concepts involving complex formulas and statistics. To summarize the mode of its operation, two patterns need to be understood—the reason that the stock market fluctuates and the hidden effect that the World Cup brings.
To understand the World Cup Effect, comprehension of the pattern of the stock market needs to be thorough. Several factors cause the stock market to fluctuate, and one of them is the effect of demand and supply, which corresponds to buy and sell orders. When the number of buy orders exceeds the number of sell orders, there tends to be a shortage with more demand than supply. Likewise, a surplus arises when there is a higher number of sell orders than buy orders. The consequence follows behind is quite similar to economics: whenever there is a shortage, there is an appreciation in price, and vice versa.
The demand in the stock market depends on the funds the investors plan to devote. With more funds, the buy orders tend to boost and thus pull up the market's general price, and vice versa. Consequently, the stock market will react vigorously to fluctuations in the number of funds that are available. Just in time, as the World Cup began, one of the most popular gambling parties across the globe kicked off—the football pool. Investing in stocks is a form of gambling since the investors never know what will happen with a hundred percent certainty. What they can count on are no more than patterns and probabilities that are calculated through statistics. Therefore, those who thrive in stock markets are generally much keener on concluding patterns, calculating probabilities, and investing over their assumptions, which is quite similar to gambling over promising probabilities and outcomes. Thereby, it is highly likely that they not miss the colossal ‘investment.’ As more funds that would otherwise have been invested in the stock market flowed into the football pool, the trading volume tended to drop. Research conducted by the European Central Bank (ECB) and the Central Bank of Netherlands (DNB) indicated that in the 2010 and 2014 tournaments, trading volumes fell by 55% and 48%, respectively. This phenomenon results from a surplus situation when the number of sell orders significantly exceeds that of buy orders, which drives the consequence of an overall fall in the stock market across the globe.
In addition to the lack of funds, the timeline that the World Cup follows is also detrimental to the stock market. To the US stock market, the tournament timeline, which begins at 10 am and finishes at 4 pm, perfectly overlaps with the trading hours. Thereby, instead of focusing on the stock market, the attention of investors tends to be distracted towards the tournaments. Consequently, the trading volume tends to drop significantly, and so does the general price level of the market. To the Asian stock market, the timeline is inverted and overlaps with our sleeping time. Those who are enthusiastic football fans may stay up late to catch up with the tournaments. As a result, their concentration level may drop during the daytime when they are trading and thus bring about low efficiency. This phenomenon of distraction appears similarly across the globe and brings about similar effects. During the World Cup in 2010, trading volume fell 38 percent in European countries, 75 percent in Brazil, and 79 percent in Argentina. In Chile, trading all but ceased, falling an incredible 99 percent during matches involving the national team. Chileans were more likely to focus on the pitch than the pit during matches involving other countries when trading fell by 79 percent. Meanwhile, due to its hypothetical basis, the theory about overlapping timelines appears to be relatively frail in the face of a lack of funds. It hypothesizes that the attention of investors is likely to be distracted by the ongoing tournaments, which may act inversely.
To conclude, the essence of the World Cup effect is the manipulation of the egotistic and gambling mentality possessed by the investors, while the overlapping timeline acts as a catalyst. As the attention of investors shifts from the stock market to the football pool and the tournament, the momentum and volume of trading get distracted and thus resulting in a general fall in the stock market across the globe. However, as mentioned in the starting paragraph, the effect is merely a playful name in describing the seemingly common phenomenon. In other words, the notion of a World Cup effect cannot hold up in the face of the intrinsic factors that drive stock markets to fluctuate. These factors include an overall falling trend throughout the year due to the pandemic outbreak, economic recession overlapping the timeline of the World Cup, etc. Thereby, the World Cup effect partially contributes to the overall stock market slump, followed by a solid evidence base. And yet there is still a long path before being completely verified.