Over the past few weeks, being out and about and talking to people, the British penchant for talking about the weather and its current rather rainy bias, has hit a fairly ‘high’ point in my estimation.

As a UK resident, you grow up and expect that the weather will be a recurring talking point, but this being the case, it got me thinking about the impacts that the weather might or might not have on investments and investment decisions?

As a practical matter, it isn’t difficult to test the correlation between stock market performance and weather pattern data. Meteorologists and climatologists’ chart everything from average sunshine to ocean currents, and Stock Market performance is a matter of public record.

The trick is trying to pick the right data to compare. Peer-reviewed studies have disparate and conflicting results. One recent and famous example was “Weather-Induced Mood, Institutional Investors, and Stock Returns,” which came out of Case Western Reserve University in Cleveland in 2014. It found that relatively cloudier days increased perceived overpricing in individual stocks and, subsequently, led to more selling by institutions.

Another report “Stock Returns and The Weather Effect” was published in the Journal of Financial Economics in 1980. It seemed to find a very large impact factor, under what was referred to as a “calendar time hypothesis.” However, further review found that weather was a much smaller predictive variable than whether the trading day was a Monday!

The scientific approach works wonderfully in physics or chemistry, where independent tests are controlled and variables are isolated, but nobody can run controlled tests on the ecosystem or the global economy. The systems are too large to replicate and too monstrously complex to fully understand. Data has its limits, and the best a market analyst can hope for is to show correlation, not causation.

One reasonable theory about weather and Wall Street suggests that severe weather interrupts business processes, supply chains and consumer movements, among other factors. In fact, the financial media often blames a sluggish quarter of gross domestic product (GDP) growth or stock market performance on weather problems. Though a popular idea, not everyone agrees.

One alternative theory, an offshoot of behavioural finance, states that weather clearly affects mood, and mood clearly affects investor behaviour. This link appears like a good argument for weather-influenced stock returns, but it’s probably not as strong as its proponents make it sound.

I think irrespective of the reports and analysis, that there are certain things that are influenced by weather. Most summer holidays are sold in the cold dark days of the winter months. On rainy days the corner shop will bring out its rack of folding umbrellas, and then on warm days, uncover its ice-cream machine!

So, there may (or may not) be a correlation between investments and weather, but what about individuals?

I can recall wanting to discuss someone’s attitude to risk at a meeting, but their saying to me that they were not having a good day, so they would rather not do it at that time as the result would probably not be a true reflection of their feelings!

I tend to feel that regardless of the research, that one should perhaps always take a small step back and consider whether there are ‘outside influences’ such as the weather that are effecting your decision. This does of course cut both ways, a cold damp day might influence one way, and a warm ‘feeling good’ day might adversely affect another.

In short, when thinking about investments, analyse yourself before analyzing markets.

This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned about the content hereof and any such action or inaction. Professional advice is necessary for every case.

 

Neil Dainton Financial Planner

Dip PFS