Do Weather Patterns Impact Investor Behavior?
Investors and analysts have speculated and debated the effects of weather on the stock market for a long time. Although concrete evidence has never supported this theory, the thought of it happening still lingers in the back of many of the brightest financial minds. Whether it’s a sunny or a stormy day, there are indications that weather patterns impact investor behavior.
Academic researchers have continued to question if weather has any direct effect on the stock market, examining compelling discoveries. Professor Ben Jacobsen won an international award enabling him to study the seasonal effect on stock returns. Unsurprisingly, Jacobsen found that there’s a strong seasonal effect in many countries.
The research found that stock market returns are often much lower during the summer and fall months than in winter and spring ones. That said, why this trend happens still isn’t known. Jacobsen’s research closely examines studies from other researchers who look at if weather changes investors’ moods and digs deeper into vacation patterns and seasonal affective disorder.
The Sunlight Effect
A research paper written by Hirschleifer and Shumway examines sunlight and its effect on the stock market. Their paper finds that weather does affect stock market returns, and this effect comes from sunlight – or a lack of it. This “sunshine effect” is based on the psychological factors that influence a person’s decision making when he or she is exposed to a sunny or cloudy day.
For example, the annual nominal market return on sunny days is about 24.8 percent versus 8.7 percent on cloudy days in New York City. Based on this theory, sunshine is the driving force behind these stock market trends and other weather conditions like rain or snow are unrelated to market returns.
Among other things, lack of sunshine has been linked to tipping, depression, and suicide. The psychological evidence suggests that people feel better when they’re exposed to more sunlight and are more optimistic about investing in the stock market when the sun is shining. Consequently, they may mistakenly attribute their good mood to positive economic prospects and not the sunny weather.
The Temperature Effect
Many studies also focus on the fact that temperatures affect stock market returns, too. Being that temperature is one of the meteorological factors that greatly influence people’s moods, it’s important to examine what role temperature plays in affecting investors when they put their money into the stock market.
According to this research paper, there’s definitely a “temperature anomaly” in the stock market. Specifically, higher temperatures bring out apathy in investors and they earn lower returns. Conversely, lower temperatures encourage aggression in investors and they earn higher returns. The latter relationship is much stronger statistically.
Seasonal Affective Disorder
When it comes to sunlight and the stock market, many researchers take seasonal affective disorder – or SAD – into serious consideration. Anyone is capable of getting this disorder, but it’s more common in people who live in areas where winter days are extremely short and there are significant change in the amount of daylight in different seasons.
Common symptoms of SAD include feelings of sadness, moodiness, and anxiety. A paper written by Kamstra, Kramer and Levi examines the effects of depression caused by SAD and the lowered risk-taking behaviors that result in a variety of settings, including those in the financial sector.
Based on psychological evidence that suggests SAD is linked closely to the number of daylight hours a person experiences, and the stock market behaviors at different latitudes on the equator, it’s reasonable to assume that there’s a correlation between the two. Again, sunlight seems to have an effect on how investors handle their money in the stock market.
The Ultimate Effect
The weather’s impact on the stock market has far-reaching effects of its own. The stock market guides fluctuations in many other markets around the world. For instance, if you’re thinking about buying a house, don’t just limit yourself to looking at the housing market trends and browsing insurance quotes at homeownersinsurance.com; you’ll also want to pay attention to the stock market in general.
Whatever specific market you’re interested in, knowing the seasonal effects on the stock market and how weather can impact it could help guide your choices.
Whether it’s the seasons, the sunshine, the temperature, or a disorder, the weather seems to have a strong correlation with changes in the stock market. Although you don’t need to run out into the sunshine every time you think about investing, it’s a good idea to know about how weather may affect the stock market and what it could mean to your portfolio.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.