Rainy Day and Markets
“Buy not on optimism, but on arithmetic.” – Benjamin Graham
Of all the reasons for the ups and downs of quarterly stock market performance, weather is seldom given any credit—or blame. Of course, hurricanes or tornadoes, have at least a short-term effect on market events. But researchers have found correlations between the stock market, institutional investors, and everyday aspects of the weather.
Everyday weather, like sunshine, rain, and temperature, may have noticeable impacts on market performance. The field of behavioral finance, which describes how psychology influences investor decisions, helps to explain this connection.
A recent study investigated the impact of weather conditions on the performance of institutional investors. You might think that weather has no effect on these investment professionals. Generally, an institutional investor works for a large organization (e.g., bank, pension fund, labor union, or insurance company) that makes substantial investments on the stock exchanges. Investopedia says, “Institutional investors often buy and sell substantial blocks of stocks, bonds, or other securities and… The group is also viewed as more sophisticated than the average retail investor and, in some instances, they are subject to less restrictive regulations.”
This academic study had two competing hypotheses. The negative mood hypothesis suggests that bad weather induces a negative mood among asset managers and results in worse portfolio performance. The productivity increase hypothesis theorizes that bad weather increases the productivity of asset managers by reducing cognitive distractions from outdoor leisure activities, leading to better investment performance.
Interestingly, there is strong supporting evidence for the productivity increase hypothesis that bad (rainy) weather leads to better portfolio returns. The reason is because bad weather is associated with an increase in investors’ accessing corporate filings, especially insider trading filings, further corroborating the productivity increase hypothesis. In other words, if it’s rainy outside, institutional investors work harder/longer (e.g., because they aren’t thinking about playing golf today) and have better quarter-over-quarter performance outcomes with respect to the buy-and-hold portfolio.
In subsections or subsample analysis, the research finds that institutional investors managing active strategies, having short time horizons, or preferring to invest in small stocks and growth stocks gained a more pronounced benefit from the weather impact.
So, how does this interesting academic study on the weather effect on institutional investors pertain to our clients who are goal-focused and planning-driven investors? It does not affect us very much. (Other than perhaps wishing for more rain in and around where our fund managers live and work.) Not being market-focused and current-events driven allows you to benefit over the long-term horizon. Long-term investment success comes from continuously acting on a plan. Investment failure may be the result of continually reacting to current events in the economy and the markets.
Investors can focus on the daily rain clouds and sunshine the market brings. Or they can think about the long term. It’s common for people to move south in search of more sunshine. But do they expect balmy conditions all the time? No. That’s the weather, which can change day-to-day. Instead, they’re relocating for the climate, the conditions they expect over the long term. Because while it will often be sunny, people know a thunderstorm can blow through.
Daily stock movements are like the weather – they vary from day to day. While some days will bring rain, you invest because you expect to be rewarded over time. You focus on the long term. Be it the obvious market movements surrounding major weather events or the more subtle relationship with the daily forecast, making investment decisions based on weather alone is tricky.
As an investor, what’s most important for you is building and regularly investing in a diversified portfolio that can weather the storm, whether that’s literal or metaphorical.
 Zhang, Lei, Rainmakers: Bad Weather and Institutional Investor Performance (October 27, 2022). Available at SSRN: https://ssrn.com/abstract=4260593 or http://dx.doi.org/10.2139/ssrn.4260593