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Look out the window and answer this question: is
it sunny or cloudy? Now, look at the calendar. Are we
experiencing more or less hours of daylight? What do
these questions have to do with investment returns?
More than you may think.
In 2001, academic researchers David Hirshleifer
and Tyler Shumway put scientific method to an old
trading axiom—markets do better on sunny days—
and concluded there was indeed merit to the myth.1
By early 2003, a working paper published by the
Federal Reserve Bank (the “Fed”) of Atlanta’s2
research group
took the argument a step further by
demonstrating the existence of a positive correlation
between variations in daylight, the mood of investors
and investment returns. All of which begs the
question, why?
The answer rests in gaining a better
understanding of seasonal affective disorder “SAD”
brought on by the reduced daylight hours of fall and
winter.
Psychologists have extensively documented
recurring problems associated with SAD.
Characterized by such symptoms as prolonged
periods of sadness, chronic fatigue, depression,
difficulty in concentrating and sleep disturbance,
SAD, by some estimates, may affect the lives of as
few as 10 million and as many as 25 million people
in the United States. Research suggests that
depression brought about by shorter days
translates into a greater degree of risk aversion.
In their working paper, the Fed researchers
present a statistical analysis suggesting a
supportable connection between market returns
and the changing amount of daylight experienced
as fall turns to winter and winter turns to spring. As
daylight hours begin to wane in the fall, investors
afflicted with SAD rebalance their portfolios in favor
of relatively safer investments that in turn, may
drive market returns lower. As the days start to
grow longer, these investors begin to assume more
risk again, thereby driving up market returns.
In a pattern similar to the onset and remission of
SAD, their data suggests September and January
appear to be the extreme points in the seasonal
daylight market cycle. The researchers are quick to
add, however, that devising a viable trading strategy
based solely on the changing amount of daylight is
fraught with pitfalls. In fact, they tried to create such
a strategy—but to no avail.
What I believe they did find is corroborating
evidence to support the contention that markets are
not always rational—sometimes they are just plain
emotional. On the other hand, perhaps what they
are pointing out is simply that it is easier to invest
when you can see what you are doing.
1 Hirshleifer, David and Tyler Shumway, “Good Day Sunshine:
Stock Returns and the Weather,” the Fisher College of Business
at Ohio State University and the University of Michigan Business
School, respectively, August 17, 2001
2 Kamstra, Mark with Lisa Kramer and Maurice Levi, “Winter
Blues: A SAD Stock Market Cycle,” Federal Reserve Bank of
Atlanta working paper 2002-13, July 2002
This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its
accuracy. The forecasts and opinions in this piece are not necessarily those of Van Kampen, and may not actually come to pass. Information
in this report does not pertain to any Van Kampen product and is not a solicitation for any product.
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