Have you thought about how weather might affect your portfolio? When I searched online for the words, “weather + Wall Street,” I learned that weather might affect various industries and that it also may affects investors. While many investors realize that some investments are seasonal, many investors may not know that other investors believe that they may be influenced by the weather.

In 2005, a Massey Finance Professor won a $10,000 international award for his research on whether the weather really does affect the markets. Professor Ben Jacobsen's paper, entitled, “Is it the Weather?” suggested a strong seasonal effect in stock returns in many countries. Jacobsen contended that stock market returns tend to be lower during summer and autumn months than they are during the winter and spring.

Jacobsen's research focused on the Asia-Pacific region as he looked at previous studies that tend to argue that weather influences the mood of investors. It also cites vacation patterns and SAD (seasonal affective disorder). While he discovered a strong seasonal pattern in investor habits, he also stated, “It seems SADS, temperatures and that old market wisdom 'sell in May and go away' are all possible explanations.”

Jacobsen's observations are not new. As early as 1909, a New York Times article focused on how weather affected stock transactions:

"Business," said the stock broker who has grown gray watching the ticker unreel its tale of ups and downs - "business is usually supposed to be a cold-blooded, unemotional affair. Hard facts, or what are rumored to be hard facts, are supposed to be the only things that boom or depress market prices. But if you had stood as I have, day in and day out, year after year, watching the fluctuations of stocks, you would long ago have discovered that the weather is a constant bull or bear influence on the market."

A more recent social science paper, written in 2008, asserts that “The relationship between the weather and stock market returns has been well documented both empirically and theoretically.” So why did Lazaros Symeonidis, George Daskalakis and Raphael N. Markellos feel the need to write yet another thesis concerning the weather and how it affects investors? They considered, for the first time, the impact of weather on stock market volatility and how it affects the movements of several stocks. They discovered that, on sunnier mornings, investors might discover higher levels of time-varying market risk.*

The year before that paper was published, Shankar Vedantam suggested, “Buy cloudy, sell sunny,” in a Washington Post article. He based his adage on research conducted by David Hirshleifer and Tyler Shumway, who showed that the “annualized average return on perfectly sunny days was 25 percent, while the annualized average return on overcast days was only 9 percent.” Sunny days tend to influence optimism in an optimistic way, whereas cloudy days tend to put a damper on anything that might want to move upward.

The problem here, as I see it, is that when it's sunny in Buffalo, it may be cloudy in Telluride. But, it can be cold in both places at once, and cold weather also may influence stock market movements. According to a Psychology Today article, “Uncomfortably cold weather seems to stimulate aggressiveness and a willingness to take risks, contend Melanie Cao and Jason Wei, professors of finance at York University and the University of Toronto. By contrast, apathy prevails in the heat...”

These papers, articles and theories are part of a movement called “behavioral economics,” a study that links psychology to economic and financial analysis. While many folks take this type of study seriously, others merely look to weathermen to determine how to adjust their investments. Reuters noted in 2007 that hedge funds and Wall Street firms were turning to meteorologists to predict the impact that weather conditions would have on stocks. Some companies hired weather specialists to work in house.

While I believe that weather does affect moods for many folks and that Mother Nature may influence how some people trade their stocks, my inclination is to look at how weather may affect the actual investment. Many investors already realize that inclement weather can paralyze entire sectors (such as hurricanes in the Gulf of Mexico). That's a fact that fits the “cold-blooded, unemotional affair” that the century-old New York Times article mentions above. That's weather that an investor can sink teeth into.

How can you use this information to bolster your portfolio? Two suggestions:

1. Watch the weather. For instance, recent reports suggested that El Nino is returning, but that its impact may not be felt because it is moving slowly. If you want straight-from-the-horse's-mouth information on this weather pattern, visit Earth Systems Research Laboratory (ENSO) for more insight on how this weather pattern might affect your portfolio.
   
   
2. Practice a “Buy and Hold” mentality. After all, it might be sunny on your shores, but it may be cloudy in Los Angeles (or at least smoggy). If you've conducted your research on your stocks and stay on top of news that affects those investments (including weather patterns), then you've done what you can do without delving too deeply into psychological waters. After all, you may have better things to do (like go to the beach).

Until Later,
Linda Goin