Weather?

February 6th, 2021| Topic: RaMbLeS | 1

A couple of weeks ago Forbes ran an article on the stock market and its relationship to the weather.

Yeah, right, weather! We’re more interested in earnings per share and price-to-earnings ratio and cash flow and industry dynamics and trends and liquidity and stuff like that. Not degrees Fahrenheit and millibars pressure and mph windspeed and percentage humidity. Of course, not!

Well, we might be wrong.

And we aren’t talking about meteorological catastrophes like hurricanes and floods. Nope. Just mundane weather parameters.

David Hirshleifer and Tyler Shumway of Ohio State and University of Michigan, published a study in Journal of Finance: “Good Day Sunshine: Stock Returns and the Weather.”

Remarked Shumway:

The big question we were hoping to answer is: To what extent do transitory moods or emotions affect markets.”

The study looked at the relationship between morning sunshine in 26 cities around the world and daily returns of their respective countries’ stock market index between 1932 and 1997.

Sunshine is strongly positively correlated with daily stock returns. After controlling for sunshine, other weather conditions such as rain and snow are unrelated to returns. If transactions costs are assumed to be minor, it is possible to trade profitably on the weather. These results are difficult to reconcile with fully rational price-setting.”

They are, indeed!

Shumway:

We liked the sunshine variable because it’s clearly tied to people’s emotions and moods and we don’t have a great story for why it would affect fundamentals. It really holds up when you go international.”

They were laughed at, recollects Shumway. After all, emotions, including those precipitating laughter, are generally how people think of the stock market and are often the basis for their trading habits!

Another scientist, Bernard Ong of the NYC Data Science Academy performed a similar study, albeit limited in scope, looking only at New York and analyzing only two years’ worth of data. Well, guess what? The daily maximum temperature had a medium to medium-high positive correlation to the stock market especially in the colder months, when warmer temps might stimulate overall optimism.

Ong:

There is a behavioral aspect to market sentiment. It’s not so much that it’s hot; it’s a representation of what that means psychologically to you.”

But he wisely notes:

I wouldn’t recommend anyone use the temperature as the sole driver to understand stock behavior; it’s 100 times more complex than that. That’s because correlation doesn’t equal causation—meaning that just because stock prices moved with weather changes, that doesn’t mean they did so because of the temperature.”

Forbes concludes:

As an investor, what’s most important for you is building and regularly investing a diversified portfolio that can weather the storm, whether that’s literal or metaphorical.”

To that, I say, “Amen!”

When the whirlwind passes, the wicked is no more,
But the righteous has an everlasting foundation.
Proverbs 10:25

That bit of inclement weather is often a picture of divine judgment. I.e., when divine Judge rules, wickedness and those who perpetrate it will have no place. But those who follow God, the righteous, his faithful and devout, will remain established forever—those who place their trust in Jesus Christ, as their only God and Savior.

Yup, that’s the only way to “weather the storm”—the storm that matters, that storm that can determine one’s everlasting security.

For You Yourself bless the righteous one, Yahweh,
with favor like a shield You surround him.
Psalm 5:12

And the market? The Psalmist declared …

I was young, [now] also old,
but I have not seen the righteous forsaken,
or his descendants seeking bread.
Psalm 37:25

SOURCES:
Forbes; Journal of Finance