Anyone who thinks investors are always rational should ponder an intriguing new study that shows how a sunny day in New York or an impending holiday can move stock prices.

The research underlines how important states of mind can be to investing. Despite non-stop data crunching and computer gymnastics, the market may not be quite as bloodless or as efficient as many theorists like to assume.


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In some ways, this is reassuring, because it demonstrates human beings are still in charge. But it also raises interesting questions about whether we should attempt to embrace predictable psychological swings or do our best to banish them from our individual portfolios.

Consider, for instance, the strange effect of Daylight Saving Time. Moving the clock forward or backward isn’t a big economic event. At worst, it’s a mild annoyance to us. Yet the grumpiness that follows a time shift appears to have a discernible effect on stock prices, according to a working paper by David Hirshleifer of the University of California, Danling Jiang of Stony Brook University and Yuting Meng of the University of South Florida.

Their paper, published this week by the National Bureau of Economic Research, found that some stocks habitually lag behind their counterparts around the time the clock changes. These same stocks also tend to do poorly in September and October, as days grow shorter, and on Mondays, when we’re all depressed at going back to work.

But there is an upside. This group of stocks reverses course and performs unusually well during more upbeat periods, such as in the run-up to a holiday or on days when the sun is shining on New York (and, therefore, Wall Street). The same stocks tend to prosper in January, perhaps as carryover from holiday cheer. They also perform well in March, when spring is in the air, and on Fridays.

This is a rather odd pattern. It’s nearly as if these stocks are moving in line with people’s moods.

In fact, that’s exactly what’s happening, according to the researchers. Traditional finance theory measures the sensitivity of a stock to overall market moves with a measure called beta. The researchers suggest this could be augmented by a measure called “mood beta,” which would measure how sensitive a stock has been in the past to collective shifts in mood, even if that sentiment shift has nothing at all to do with the business news.

To be sure, this sounds rather fanciful. But the researchers backtested a strategy of investing in high mood-beta stocks around reliably happy times, while simultaneously shorting low mood-beta stocks. They then reversed this pattern around more predictably downbeat times, such as September, October or Mondays.

They conclude that this mood-based strategy would have beaten the market. “Assets that outperform in the past seasons when investors are in upbeat moods tend to outperform in future seasons when an upbeat mood is expected,” they write.

This is intriguing stuff. Some enterprising fund manager will probably launch an investment vehicle designed to copy the strategy. But does it make sense for individual investors to get involved with an attempt to mine such market anomalies?

Almost certainly not. Stock market anomalies have a way of disappearing once they’re identified. There’s also the question of whether a market quirk such as this is strong enough to survive all the trading costs and tax expenses that would be involved in exploiting it.

Still, the new research does offer a useful lesson. It shows how all of us are prone to making decisions based on irrelevant inputs, such as whether the sun is shining or the weather is warming up. If such factors can move stock prices, it’s easy to see how other irrelevancies, from politics to news headlines, can also affect our decisions in ways we don’t realize.

The best takeaway for most of us is to mistrust our impulses and stick to a predetermined strategy that removes emotion from the equation. Indexing qualifies. So do various number-based strategies that select stocks according to defined criteria. Both ensure you’re picking stocks rationally – and that would appear to put you one step ahead of many investors.


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Simon Marples, CAIB
Corporate Wealth Advisor
CanTrust Financial Services Inc.
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