Since the invention of the stock market, economists have tried to discover what makes equities change value. Fluctuations in stock prices have been linked to many factors, from regional effects such as inflation to global events like pandemics and wars. But, of all the reasons for stock market volatility, the effect of weather is rarely given any credit.
Plenty of evidence supports that significant meteorological events, like devastating hurricanes or tornadoes, have an obvious short-term effect on the money markets. But there may also be some correlation between stock prices and the more mundane aspects of the weather.
Have you ever felt down after a long stretch of gloomy weather? Well, you are not alone. Research confirms a link between weather conditions and their psychological effects on humans. In other words, the impact that specific meteorological factors such as cloudiness, humidity, and temperature have on traders’ moods may translate to stock price changes.
In a paper titled “Good Day Sunshine: Stock Returns and the Weather,” authors Tyler Shumway and David Hirshleifer studied the relationship between morning sunshine in 26 cities worldwide from 1982 to 1997 and the daily returns for that country’s leading stock market index. They found that the sun has a strong, positive correlation with daily stock returns across all 26 cities.
Bernard Ong, a data scientist with New York City Data Science Acadamy, took a similar approach to find the effect of typical weather on stock market prices. In Ong’s research, he investigated the correlation between six weather factors and the performance of the S&P 500. His findings suggested that the daily maximum temperature had a medium to medium-high correlation to the stock market.
Read more weather & climate related stories at Weather & Radar USA.
Conclusions by Ong and authors Shumway and Hirshleifer have been met with some controversy by economists. Many believe that weather effects are already “priced” into the market. In other words, the psychological impact of weather on the population is already represented in the current prices of stocks, so this factor cannot be used to forecast future price movements.
On the other hand, some believe that their findings show promise, and a deeper dive into the unexpected behavioral connections in the market is still needed.
The million-dollar question is: Should you base your investment on the forecast? I wouldn’t bet on it. Stock market performance is a complex beast that is influenced not only by investor moods but also by the state of the economy.
Before adding a stock to your portfolio, a strong recommendation would be to understand the asset’s underlying value. The underlying value of company stock, for example, is based on the parent company’s fundamentals, which include factors such as the company’s profits, cash flow, management team, the competitive landscape, industry dynamics, and the pace of economic growth. It’s always best to seek out advice from a certified professional.