Next week brings the first day of Spring – an arrival that can’t come soon enough in this most strange year! To mark the changing of the seasons, this week we thought we would take a lighthearted look at the relationship between money management and the weather. You might be surprised to know that serious researchers have looked at this question. What’s more, for investors, it really might be a case of “Hello Sunshine!”

A number of studies have examined the impact of sunshine on mood and any ‘flow-on’ effect that impact might have on share markets. The idea is that better moods lead to greater optimism, which in turn lead to greater demand for shares and push prices higher. In 2011, Mitra Akhtari (then of UC Berkeley, later of Harvard University) performed both a literature review and her own analyses to conclude “that hours of sunshine in New York City has a significant correlation with stock prices.” She even went on to conclude that “an argument can be made for the inclusion of behavioral variables in asset pricing models.” That is, when you are doing your sums about what you think a share of a particular company is worth, you should factor in the level of sunshine you expect to experience while you are holding your shares.

When we first read it, we really liked that suggestion. After all, simply checking the weather forecast to conduct your asset pricing is a much easier calculation to make than using something like the Capital Asset Pricing Model (CAPM) to value prospective shares. CAPM is much loved by share market analysts. It usually looks like this:

Ra​ = Rrf ​+ βa ​∗ ( Rm​ − Rrf​ )

A formula in which:

Ra = Expected return on a security;

Rrf = Risk-free rate;

Rm​ = Expected return of the market;

βa ​= The beta of the security; and

(Rm​−Rrf​) = Equity market premium​.

Unfortunately, when we looked at what Akhtari suggested a little more closely, we saw that she is only proposing that the expected weather become part of the asset pricing formula. Presumably, this would make CAPM look something like this:

Ra​ = (Rrf​ + βa​ ∗ ( Rm​ − Rrf​ )) X ☀️

Of course, when considering a link between sunshine and share prices, it pays to get the causation right. Specifically, does sunshine cause markets to rise, or does cloudiness cause markets to fall? This might sound like a silly question, but in 2014 four researchers found that “that relatively cloudier days increase perceived overpricing in both individual stocks and the Dow Jones Industrial Index, and increase the selling propensities of institutions.” If these guys were right, then maybe it is not so much that markets rise on sunny days than that they fall on cloudy ones. The subsequent improvement in prices on sunny days might simply be a correction of prices that had fallen too much when the sky was cloudy.

If that is the case, then the CAPM might look like this:

Ra​ = ( Rrf​ + βa ​∗ (Rm ​− Rrf ​)) ÷🌧

The impact of weather on the market does have its sceptics, however. Way back in 1997, two German researchers named Kramer and Runde came to a much less poetic conclusion about the relationship between the weather and market movements. “We find that whether or not the null hypothesis of no relationship can he rejected depends mostly on the way the null hypothesis is phrased, and that no systematic relationship seems to exist.” That is an academic’s way of saying that researchers who could find a link between weather and prices were basically cheating, by asking questions in a way that lead to particular answers. Kramer and Runde would probably use a CAPM formula more like this one:

The idea that Ra​ = ☀️  or  🌧  Makes Us 🤣

So, perhaps unfortunately, it looks like no one really knows whether the arrival of Spring will improve share prices. But hopefully, the better weather will improve our mood. Happy first day of Spring to you and your loved ones. And well done on getting through the WWE (‘Weirdest Winter Ever’)!