Will April Showers Bring May Flowers?

Image by Mylene2401 from Pixabay

Behavioral science and stock markets are two areas that are often moving to the top of my must-read list. I have been fascinated for years by the various drivers affecting stock prices. Often one forgets that superficially quite mundane things can exert an enormous influence on the latter.
Among the drivers that are scarcely on anyone’s radar is the weather. And what is a better month to try to predict the unpredictable than April with its notoriously fickle weather patterns?

Psychologists have examined correlations between people’s behavior and the weather for a long time, and numerous studies on the topic have been done. An interesting one I have come across is a study by Tyler Shumway and David Hirshleifer entitled “Good Day Sunshine: Stock Returns and the Weather.”
Shumway and Hirshleifer examined the relationship between morning sunshine and the daily returns of the country’s leading stock market indexes and have found strong correlations.

The weather factor plays a major role in April and is one of the best-known seasonal drivers. Sunny weather and mild April temperatures seem to have a noticeable impact on market performance by enhancing the confidence of bullish traders, who are then pushing stock prices up.

The analysis below measures the performance of the S&P 500 index in every month of the year, averaged over a 25-year period.

Average monthly return of the S&P 500 Index since 1996

Average monthly return of the S&P 500 Index since 1996

Source: Seasonax

On the chart above it can be clearly seen that April has been one of the best performing months for decades. In 2020 the pattern once again repeated, as there was a sharp rebound in US stocks in April after the market bottomed on March 23. Whether the pattern will repeat again this year is hard to say, but trading psychology is often influenced by so-called self-fulfilling prophecies.

Other Major Impacts of Weather Events

Spring and warmer weather improve everybody’s mood.
But what happens to the stock market in times of inclement weather?

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Monica Kingsley 2 weeks ago Contributor's comment

That's right, some industries and companies are affected by various sources of seasonality apart from weather. Combining these with strong technical and fundamental analytical approach can selectively improve one's results. Knowing where the indices, sectors are going and why is the first step, taking care of the company risk and considering seasonality effects comes then.