“Everywhere you go, you always take the weather with you”. Probably most music fans are familiar with this line from the famous song by the Australian band Crowded House. But according to a recent study, investors should keep this line in mind as well. Unfriendly weather could influence market movements. Researchers DeHaan (Stanford), Madsen (University of Minnesota-Twin Cities) and Piotrsoki (Stanford) found out that ‘weather-induced negative moods’ decreases analysts’ activity levels, which leads to slower responses to earnings news. As a result, market participants could miss important opportunities during key events.
The research is quite thoroughly executed. More than 636,000 market observations by 5,456 brokerage-houses were observed. Since the researchers knew where the analysts were located, it was easy to link the weather to publications. The study found out that rain, wind and clouds can cause a mild depression which affects an analyst during the process of writing a report. As a result, at cloudy days, the chance that a buy, hold or sell rating is published, is 18% lower compared to a clear, sunny day. In addition, the team led by DeHaan found that trading volumes are lower on days with unpleasant weather. Sunny days cause a better mood and a more energetic state, resulting in higher activity on the stock market.
But does that mean we should stay away from the market during autumn and winter? Not exactly. In fact, November rain and short December days seem to provide the best conditions for stocks to rise. Both are historically the best performing months, although the Spring weather of April (3rd best performance) is healthy for the stock markets as well. The warmer and sunnier part of the year (May until September) shows historically a poor performance.
So where does that leaves us as investors? Probably the best is to be aware of the effects of external factors on our decision making process. In the long run, the weather may have no significant impact on the performance of the market. But the study by DeHaan et al teaches us to reflect on our behavior. We should distance ourselves from bad moods when anticipating on market news. Maybe a vitamin D boost may help as well…
