Ming Dong and Andreanne Tremblay at York University in Toronto have found that in mild-weather countries such as the UK, high temperatures in August are associated with lower stock market returns. Historic relationships suggest the fourth hottest August in the last 40 years would cause returns to be almost one percentage point lower in the month than they would be in the fourth coolest August.
This, they say, is because the best equity returns tend to come when the weather is comfortable, as such weather improves our mood and so encourages us to buy risky assets.
This simple mechanism implies that the effect of weather on returns varies from month to month and country to country. So, whereas high temperatures mean uncomfortably oppressive heat in August and hence lower returns, they mean a pleasant Indian summer in September and hence rising share prices. And whereas rain is welcomed in hot countries as pleasantly cooling, in colder climes it worsens our mood and depresses returns.
The extent to which it does so varies from month to month. Dong and Tremblay show that in countries such as the UK, rain is especially bad for shares in September - because it dashes hopes of an Indian summer and reminds us of the approach of winter - and in March and April, as it delays the arrival of spring.
Most of this is intuitive. But there's one more surprising finding. Dong and Tremblay show that in colder countries colder winters are strongly associated with better returns. This, they say, could be because colder weather increases our willingness to take risks; it's the Vikings who are famous for undertaking long and risky sea journeys, not the Moroccans, and winter sports tend to be dangerous ones.
Now, it's not clear that one can trade profitably upon these weather effects: doing so requires very low dealing costs and accurate weather forecasts, which we don't have. Nevertheless, these findings do matter. They show us that, at least sometimes, share prices are driven by sentiment and that this sentiment isn't mere noise but is systematic. Investors who look only at 'fundamentals' - and, worse, try to explain moves in share prices after the fact by reference to fundamentals - are therefore missing a big part of what affects share prices.
