Forget about buying low and selling high. If you are worried about the recent volatility in the stock market, perhaps you should let the weather be your guide.
Buy cloudy. Sell sunny.
If you consistently bought stocks when the sky was gray and overcast and consistently sold stocks when the weather was bright and sunny, and you did this over a period of 16 years across 26 stock markets around the world, you would … well, let’s just say you would be lounging on a hot beach right now with a long, cool drink next to you.
Research into the psychological effect of weather on the stock market has a surprisingly long history, and no, this is not goofy theorizing by armchair investors. Data reveal strong correlations between sunshine, and possibly other weather-related factors, and the performance of the stock market.
The data obviously do not suggest that stocks always rise in sunny weather or that they always fall when it is cloudy. But the data do suggest that, on average, markets tend to go down when the sky is gray and to go up on sunny days.
In one large study of 26 stock markets around the world between 1982 and 1997, researchers David Hirshleifer and Tyler Shumway showed that the annualized average return on perfectly sunny days was 25 percent, while the annualized average return on overcast days was only 9 percent.
The researchers examined how each market performed on every trading day during a 16-year-period and compared the returns with daily meteorological data on whether it was sunny or overcast in the cities where the stock markets were located. When the researchers looked at stock performance and the weather in New York alone, they found an identical pattern.
Hirshleifer, a financial economist at the University of California at Irvine, said he was initially skeptical that there was a connection between sunshine and stocks. “We feel it is hard to argue with the data,” said Hirshleifer, who published his study in the Journal of Finance. “The evidence is quite strong … the difference is large and statistically significant and indeed comes from cloud cover.”
University of Massachusetts researcher Edward M. Saunders Jr. also puzzled over why rational investors would let themselves be influenced by the weather. Saunders examined stock market performance and New York City weather between 1927 and 1989.
“The economic effect produced is surprisingly large,” he wrote in the American Economic Review.
Various researchers have unearthed other weather-related effects. Stock markets generally tend to do better in the winter, for example, than in the summer.
Several theories have emerged to explain the findings,and some theories contradict others. One school of thought has attributed the better performance of stock markets in winter months to the willingness of people to take more risks when it is cold. Others have pointed to a more prosaic explanation: At least in Europe and North America, people tend to go on vacations during the summer.
Mark Kamstra, a finance professor at York University in Toronto, argued that seasonal variations in the markets might be linked with a psychological condition known as seasonal affectiveness disorder, which is linked to diminished amounts of sunlight starting in the fall. Kamstra based his argument on a study he conducted that looked at the number of daylight hours and stock market performance in countries located at different latitudes — where the amount of sunlight varies naturally. People with seasonal affective disorder tend to become depressed as the days grow shorter.
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