The bloodstock market is multifaceted, with bloodstock sales encompassing, for example, weanlings, yearlings, broodmares, 2-year-olds in training, and horses of racing age.  The market is also divided into private sales versus auction sales.  The most closely watched indicator of the overall economic health of the bloodstock market is the average price for yearlings sold at auction…and that is the focus here.

My research found that there is a weak positive correlation between several macroeconomic variables and the level of auction prices for yearlings:

  • U. S. consumer sentiment about the state of the economy.
  • Gross Domestic product.
  • U. S. real personal income.

As for economic characteristics that pertain specifically to the Thoroughbred industry, there is also a weak positive correlation between average auction price for yearlings in a given year and…

  • the direction (as measured by year-over-year percentage change) of the previous year’s foal crop.

Average yearling auction prices are barely or not at all related to the level of:

  • Pari-Mutuel Handle.
  • Aggregate Purses.
  • Annual returns of the S & P 500.

Thus auction yearling prices are divorced from the two most important indicators of the economic well-being of the Thoroughbred industry at the retail level—pari-mutuel handle and aggregate purses.  This is like saying that the price of gasoline at the pump bears no relationship to the per-barrel price of oil.

Further, the wealth effect–as inferred from how the stock market is performing–has little or no demonstrable relevance to yearling auction prices.

This is not to say that the overall economy does not affect yearling auction prices because it does…but not normally to the extent that might be expected.  Under extreme conditions, of course, such as the world economic crisis of 2009, bloodstock prices plunge.  The bigger surprise is that stagnant pari-mutuel handle and purses appear not to faze major yearling buyers.

A disconnect between yearling prices and economic outcomes demonstrates that horse racing is much, much more about sport than it is about business, similar to other equine competitions.  For instance, in the world of show jumping, prices are paid for horses that in several lifetimes could not be earned back via winnings.  To use stock-market parlance, the price-to-earnings ratio is often incalcuable.

Some auction buyers are so wealthy that neither economic considerations nor the state of the retail pari-mutuel industry is a deterrent.  Other less wealthy buyers, and especially partnerships that spread risk, are willing to take a shot at striking it rich and/or finding a diamond in the rough; John Henry, Seattle Slew, and other bargains are their inspiration.

The economies of the developed nations should be strong in 2018 and that will provide a tailwind for bloodstock markets.  But the average auction price for yearlings this year—and any year–depends mostly on the propensity (i.e., the animal spirits) of a few deep-pocketed buyers who are able and willing to bid up the prices for a small percentage of coveted horses…and thereby raise the average price.

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