Have you ever found yourself gazing pensively out the window, pondering the steadily darkening fall days or the unappealing prospect of hauling the dog out for a walk in a cold November rain, and then suddenly felt the need to switch some of your tech stocks to something less volatile—bank shares, maybe, or some rock-steady bond?
This exact scenario may seem like a stretch, but there’s solid quantitative evidence, culled by numerous finance scholars over the past three decades, that weather influences investing choices—somehow. When it’s sunny, we tend to be less risk averse. On the days that are short and dreary, we—meaning the collective investing “we”—tend to grow bearish, preferring to retreat from equities and, well, squirrel away capital gains in a safe place.
The research helps explain the mysterious but remarkably consistent “September effect”—markets seem to crash regularly after school starts up. But it also poses intriguing questions about the murky business of betting on (or against) climate change and, more generally, the prospect of using weather patterns to create profitable hedging strategies. After all, if you could short September or the societal sullenness that descends in November, would you do it?
Conventional wisdom holds that it’s rarely a good idea to try to time the market, unless you’re flush enough to buy the dip. But what if the science on weather and market fluctuations suggests otherwise?
In 2018, Ming Dong, a finance professor at York University’s Schulich School of Business, and Andréanne Tremblay-Simard, an associate professor in the Faculty of Administrative Sciences at Laval University, decided to look more carefully at the connection between weather and global stock returns. They cross-referenced five daily categories of weather readings—for snow, wind, rain, sunshine and temperature—in 49 countries against aggregated returns between 1973 and 2012. There were definite patterns.
“The systematic patterns of weather effects across climates and seasons,” they wrote in a study published in Critical Finance Review, “suggest that weather influences stock returns through investor mood, and that the emotional effects of the weather are stronger and more pervasive than previously documented.”
The relationship, explains Dong, is more pronounced in colder regions of the world and seems to apply to all categories of investors (the findings are based on the shifts in major indices, like the S&P 500). While behavioural research literature suggests that retail investors are more susceptible to such psychological biases than institutional investors, who are thought to be more rational, even they were not immune. “The fact that we find even institutional investors are influenced by weather is quite remarkable,” he says.
According to Tremblay-Simard, the idea for exploring these connections came from behavioural finance and economics, a discipline that delights in demonstrating how markets aren’t quite as Spock-ish as purists have long claimed. Prices can also be set by X factors that aren’t included in the basic neoclassical models of finance. “That could be emotions, social connections, or the valuing of something that’s not linked to fundamentals,” she says.
What precisely happens in investors’ minds in the moments before those trade orders are placed isn’t so clear, although some researchers have homed in on seasonal affective disorder (SAD), which is a form of transient depression triggered by light deprivation.
Mark Kamstra, a professor of finance also at Schulich, has co-authored studies that cross-reference stock market movements against the prevalence of SAD, which has been well documented by psychology scholars as a widely felt response to short winter days and daylight savings time. Those findings, he says, show that when people are feeling low, they tend to take fewer risks.
He and Lisa Kramer, a finance professor at the University of Toronto, started probing the impact on investing behaviour. “Depression looked like it could affect people’s discounting future cash flows,” says Kamstra. “They change the amount of reward they demand for taking on risk, and that can impact market prices. So that’s a rational way to think about how mood can impact markets. It’s not something you can arbitrage or make money off of. It’s just that people are demanding higher or lower rewards for taking on risks, and that changes market prices.”
Their research was further confirmed by the fact that in Australia, the SAD-market connection occurs on an inverted seasonal cycle as compared to regions well north of the equator. That intuitively obvious finding “was very satisfying,” Kamstra adds, noting that their work still meets with plenty of skepticism from traditionalists.
Dong and Tremblay-Simard, however, take a different view from Kamstra about whether these findings can be turned into an investment strategy. In a 2022 paper published in the Journal of Banking and Finance, they used two decades of weather and stock market data (1993 to 2012, in 49 countries) to build out a “global weather-based hedge strategy,” which they showed could theoretically generate annualized returns of more than 15%, or about 13% once transaction costs are factored in. During that period, average annual S&P 500 returns ran to about 6.2%. “That’s not too bad,” says Dong.
The idea, he explains, is to create a portfolio of long positions in regions with favourable weather conditions, and short positions on indices in areas with lousy weather or less daylight. “If we do this daily, that of course involves a lot of transactions, but we showed that in certain sets of regions, like Europe and Africa, it works out to be profitable,” he says. The fund would have to be global in scope and is probably not for the faint of heart. Dong says he wouldn’t be surprised if some global hedge fund managers incorporate weather into their trading strategies, but no one’s knocking on his door for advice—not yet.
A handful of academics are now looking at whether global investors are pricing in weather-related climate risk when buying and selling equities. A 2023 working paper published by the University of Cologne’s Centre for Financial Research, for example, found evidence of what the authors call “an extreme weather risk premium” using data on violent thunderstorms associated with rising temperatures. “We provide strong empirical evidence that firms which are threatened by extreme weather risk exhibit a higher cost of equity than their unexposed peers,” they conclude.
However, a 2021 paper by two Australia-based finance professors, which looked at panic selling after natural disasters and was published in Management Science, observed another response entirely. “We find that, when a firm is exposed to disasters, investors overreact by depressing the current bond and stock prices, causing future returns to be higher,” they concluded. “However, firms with a strong environmental profile experience lower selling pressure on their bonds and stocks, even though their fundamentals weakened following disasters.” The bottom line: “Improving environmental profiles pays off when climate change risk is materialized.”
Unlike the decades of data showing that sunny weather somehow correlates strongly with higher returns for investors, there’s no clear consensus on how or if climate risk gets baked into stock market fluctuations. “One of the reasons for this lack of consensus is that it’s not clear how we define climate risk,” explains Tremblay-Simard. “Do we measure emissions? Do we measure specific weather events? If so, what’s the threshold to define a major natural disaster?”
Despite those caveats, the possibility of a linkage seems to make sense. If the margins of, say, a shipping company or property insurer are increasingly buffeted about by devastating storms, there’s good reason to believe that investors will make rational choices about how much they’re willing to pay for equities in those kinds of companies.
The role of sunny weather or gloomy weather is even more intuitive, and thus the domain of the behaviouralists, as opposed to all those old-school economists who can only shrug when presented with what they archly characterize as an “exogenous factor.” As Tremblay-Simard says, “We did not start with the idea of, ‘Can we design a trading strategy so that we could make money, or could we tell people how to make money?’ It was really about, ‘Do investors’ emotions have an impact on markets?’” As it turns out, the answer is yes.
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