A group of academics at Ohio State University's Fisher College of Business asserts that, on sunny days, investors are more inclined to be upbeat and are likely to be bullish.
"There's a great deal of evidence from psychology that sunshine helps put people in a good mood and people in good moods make more optimistic choices and judgments," said David Hirshleifer, a finance professor who fills the Kurtz Chair at Ohio State University in Columbus.
"If people are more optimistic when the sun shines, they may be more inclined to buy stocks on sunny days," added the professor at Ohio State University, a public institution funded by millions of taxpayers who may not be in a sunny mood when they hear how their tax dollars are spent.
The study showed the daily difference in expected market returns between a completely overcast day and a sunny day is nine basis points (0.088 percent), or an annualized excess return of 24.8 percent.
Hirshleifer conducted the unconventional study with Tyler Shumway, assistant professor of finance at the University of Michigan. Their study has been conditionally accepted for publication at the Journal of Finance. It is also available online as a working paper at Ohio State's Department of Finance web site: http://fisher.osu.edu/ fin/dice/papers/2001/2001-3.htm
In developing the study, Hirshleifer and Shumway examined daily returns at the leading stock exchanges in 26 countries (including England, Brazil and Singapore) from 1982 to 1997. For each trading day in that 16-year period, they studied data on average cloud cover from 6 a.m. to 4 p.m. local time for the cities with the stock exchanges. All data came from the U.S. National Climactic Data Center.
The results showed that more sunshine was associated with higher stock market returns. Hirshleifer's study doesn't include an astrology reading. He doesn't believe astrology can be used to predict stock markets.
Using astrology to predict markets is "utterly ridiculous," he said. However, the study does include a survey of the correlation between bullish performance and sunshine at 26 leading stock exchanges around the world, including the New York Stock Exchange.
"This is the kind of story," said a spokesman for the Big Board, "that makes me glad that we don't comment on these kinds of things."
The spokesman was not enthusiastic about this kind of research. He added that the NYSE has not done any studies on the effects on the stock market of weather, football or even the reported citings of UFOs in either Roswell, New Mexico or lower Manhattan.
In the Hole
The study also suggested that maybe investors can learn from groundhogs.
Investors, these professors say, should also take into account whether they see their shadow walking out the door in the morning.
"Our results suggest investors can trade profitably on the weather," Hirshleifer said. "It's not a way to get rich quick and there is risk involved. But if you're optimally balancing risk and return, you should indeed take into account the weather in your trading strategy," he added.
One could conclude, from Hirschleifer's cogitations, that the safest trading would probably take place in Florida. Or maybe it would be much easier to move all the major exchanges to the Tropics.
Possibly traders, in shorts, bikinis and hot pants, would find the most friendly, sunny environment in the middle of the Sahara. There's plenty of sunshine, and, ipso facto, there should be plenty of bull markets in those climes.
But the authors of this study insist that this is serious. The climate is good for nine basis points between sunny days and cloudy ones. And that's not chump change, they remind traders.
"Nine basis points sounds small but it is only one day's returns. The daily difference in returns annualizes to an extra 24.8 percent per year. By comparison, the annual return from holding the U.S. stock market is about 12 to 14 percent per year," Hirschleifer explained.
"Of course, going in and out of the market involves extra transaction costs," he added. "But an investor who is planning to buy stocks sometime over the next week but doesn't care exactly when they may gain from waiting for a sunny day. Someone who is selling may gain from waiting for an overcast day."
Role of Psychology
While some may be tempted to sell Hirshleifer's theory short, if not question whether parents who send their kids to Ohio State should be trusted with their money, it's tough to argue that psychology doesn't play a big role in investor sentiment.
While sunshine may put a person in a good mood, says Hirshleifer, studies show people often misattribute why they are feeling good on a particular day.
"In other words," he said, "even though stock traders may feel more optimistic because of the sunshine, they may attribute their optimism to other factors, such as economic conditions or news about a company."
Other studies, he says, show people in good moods are not as likely to examine evidence as critically. This may lead traders to see positive signs about a company's stock on sunny days that they would not normally see in other weather conditions.
Geography also matters. The report cites the fact that many of the large institutional investors that drive the markets are headquartered in the same cities as the stock exchanges, according to the study.
Hirshleifer adds that the study is part of a new trend in finance in which researchers go beyond the purely rational, economic factors that govern the stock market.
"Narrowly, this is a paper on the weather. More broadly, it is part of a new approach to finance that focuses on emotions, rather than purely intellectual, cognitive reasoning processes," he added. "Perhaps the most interesting aspect of these findings is that they provide more direct evidence that moods and emotions do affect stock market prices."
After this study, "have a nice day" should become the mantra of every prosperous trader.
