Does the Weather Impact the Stock Market?

We’d like to take this opportunity to send our thoughts out to those of you experiencing crazy weather. From power outages, to high gas bills, to dangerous travel conditions, weather can wreak havoc on our daily activities and we hope everyone is staying warm, dry, and safe. Even sunny California has seen snow in parts where it has never snowed before, with extreme cold and crazy high gas prices.

This led us to wonder – does weather affect the stock market? Apparently, others have wondered about this too, as there is even an Investopedia entry for this exact question. Last updated in 2021, the entry waivers back and forth without reaching a conclusion that there is a link between weather and stock performance. So we looked further.

There is a field of study called behavioral finance, which describes how emotions, rather than reason, influence investor decisions. There is psychological evidence that weather affects people’s moods. So, do people feel more inclined to buy stocks on sunny days and sell stocks on dreary days? Tyler Shumway, a professor of finance at Brigham Young University, and David Hirshleifer researched the extent to which transitory moods and emotions affect markets. They looked at sunshine – a weather variable that has a clear effect on emotions, moods, and sentiment. Shumway and Hirshleifer examined the relationship between morning sunshine in 26 cities worldwide for the period of 1982 to 1997 and the daily returns for that country’s leading stock market index. They concluded that sunshine has a strong, positive correlation with daily stock returns across 26 different cities worldwide.

Many theorists researched this topic, across continents and myriad countries. In addition to sunshine, studies looked at temperature, humidity, and cloud cover, among other factors. From our brief overview, most studies concluded that the effect of the weather on the stock market is insignificant. See the study in Panoeconomicus (2018) for example.   

However, even skeptics will note that certain types of weather events, like hurricanes, flooding, or major blizzards – can “have ‘a definite impact on the short term’ on stock prices. This is because ‘there could be knock-on effects, like the amount of heating oil that consumers use or altered retail sales if there’s a faster-than-normal transition from winter to summer clothes,’ according to Tom Martin, senior portfolio manager at GLOBALT Investments.

Arguably, climate change creates uncertain conditions across industries and severe weather conditions can impact earnings, costs, and productivity, which can lead to uncertainty for the future of cash flow. Disruptions caused to the company’s operations and profits in turn effect investor sentiment seemingly supporting the above-noted theory. Antoniuk and Leirvik (2021) found that climate change can influence stock returns and volatility significantly. Also, Ramelli et al. (2021) revealed that climate change causes a decrease in the stock prices of carbon-intensive firms. However, contrary to this theory, Vlady (2015) hypothesizes that climate change has not significantly affected stock market performance. These competing theories, and the paper that referred to them, again highlight the debate.

If you are interested in reaching your own conclusion, check out the “Effect of weather on stock market: A literature review and research agenda” for an in-depth analysis of this topic compiled in 2021.  Or a simple Google search of “does weather impact the stock market” or other variation, will bring up a plethora of articles on weather and the stock market. Regardless of the conclusion you reach, keep in mind that multiple factors impact the stock market and investing is a very personal decision.

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