With daylight savings time ending, days getting shorter as we approach the Winter Solstice. This can affect how people feel, and invest - and it might be observable market-wide.
This time of the year can also affect the way that we view risk. My colleague Dr. Paul Kaplan interviewed York University professor Mark J. Kamstra about his research about this very area a few years ago. Kamstra’s research studied the effect of seasonal affective disorder (SAD) on stock returns across 9 countries from northern and southern hemispheres. His research starts with the medical observation that the number of hours of daylight ultimately affects a person’s mood. He then further hypothesized that this change in mood, on aggregate, might help in explaining stock market returns. Lo and behold, he found that stock markets located in the Northern hemispheres (Canada, US, Germany, Sweden, Japan and the UK) showed the lowest annual returns in the early fall months (when there is the least amount of light) followed by increasing returns peaking in January. Interestingly enough, the observations were shifted by 6 months when looking at markets in the southern hemisphere (New Zealand, Australia, South Africa).
The message from Kamstra in the paper and his interview with Kaplan wasn’t to encourage investors to devise trading strategies to take advantage of this pattern (though he offers a suggestion in the paper involving shifting investments to the opposite hemisphere) but rather to ensure investors know about this effect and its impact on perceived risk tolerance.
This is a great takeaway. Knowing one’s own risk tolerance is a key concept when investing as it acts as a guiding light when navigating choppy market conditions. Measured effectively, an investor’s risk tolerance should not change significantly over the short or medium term, nor should it be affected greatly by external factors like news flow, market movement, and certainly not the number of hours of daylight.
In some ways, the relationship outlined by Kamstra is tied to the idea of “Sell in May, Go Away”, a seasonal trading strategy where one exits the market in May, then re-enters in November. When we crunched the numbers, we found that this approach didn’t necessarily work out better for an investor over staying invested the entire time.
Perhaps there is more to be said about a nice walk in the sun.
This article does not constitute financial advice. Investors are urged to conduct their own research before buying or selling securities.
