‘Mood matters’: Why the spring forward into daylight-saving time sets stocks back
You might find it hard to believe that an hour of sleep really has this much impact. Alex Edmans, a finance professor at the London Business School, said in an interview that he also was skeptical when, as a Ph.D. student, he first encountered this and other studies into the effects of sleep on investor sentiment. But after conducting two studies of his own, he is convinced that “mood matters.”
by Mark Hulbert · MarketWatchThe U.S. stock market’s listless performance on March 11 might have been less about inflation and more about investors’ lack of sleep.
Researchers have found that the stock market tends to see below-average performance on the Monday following the shift to daylight-saving time. And just like clockwork, U.S. stocks struggled on Monday, with the S&P 500 SPX and the Nasdaq Composite COMP both losing ground, while the Dow Jones Industrial Average DJIA managed to eke out a small gain.
The first study I know of into the correlation between sleep and investor behavior appeared in 2000 in the American Economic Review. Titled “Losing Sleep at the Market: The Daylight Savings Anomaly,” the study was conducted by three finance professors: Mark Kamstra of York University, Lisa Kramer of the University of Toronto and the Maurice Levi of the University of British Columbia. They attributed the stock market’s below-average return following the spring switch to daylight-saving time to traders being “weighed down by weariness, fighting lethargy, and perhaps even facing despondency.”
Down and out
The first of Edmans’s studies looked into the relationship between sports sentiment and the stock market. Edmans and his co-authors found that countries’ stock markets significantly underperformed following losses by their teams in international sports competitions — including the World Cup and tournaments involving cricket, rugby and basketball. (Keep this study in mind during the upcoming NCAA basketball tournament. It’s called March Madness for a reason.)
The second investor-sentiment study from Edmans documented a correlation between a country’s stock market and the mood of the songs most streamed by that country’s Spotify users. In addition to being given access to streaming data for each country, Edmans and his co-authors accessed a Spotify SPOT, -0.87% algorithm that rates every song according to its valence, or positivity. The researchers found that “music sentiment is positively correlated with same-week equity market returns” in the 40 different countries they analyzed.
Edmans nevertheless urged a skeptical attitude toward all alleged stock-market patterns, noting that while they’re not all spurious, many of them are. Edmans has authored a forthcoming book on how determine if an alleged pattern is genuine, called “May Contain Lies: How Stories, Statistics, and Studies Exploit Our Biases — And What We Can Do About It.”
One of the best ways to know if an alleged pattern is genuine, according to Edmans, is to subject it to an out-of-sample test to see how it works in an entirely different sample than the one used to initially document it. With this in mind, I analyzed all springtime shifts to daylight-saving time since 1998 — the year following the endpoint of the Kamstra, Kramer and Levi study.
In the 27 out-of-sample years since then, the Dow lost an average of 11 basis points (0.11%) on the Monday following the shift to daylight time. That’s compared with an average gain of 3 basis points (0.03%) across all trading sessions since 1998. This difference of 14 basis points (0.14%) is not only statistically significant but is of the same order of magnitude as was documented in the data through 1997.
As you might have figured out from this 14-basis-point difference, you wouldn’t want to devise a trading strategy around this daylight-saving anomaly. The point of this research is to remind us that we have incredible difficulty being objective in our analysis of investments.
The investment implication is that we should devise an investment strategy that specifies — in advance — how we should invest our portfolio in all conceivable scenarios. And we should have the discipline to stick with that strategy, no matter how strongly we might feel to the contrary.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
Read more: True inflation may have peaked in late 2022 — at 18% — and still hovers around 8%