Not looking forward to this weekend’s shift to daylight saving time?
You’re not alone. Here’s yet another reason to dislike it: the shift is likely to cause the stock market to struggle this coming Monday.
That is the implication of a study, “Losing Sleep at the Market: The Daylight-Savings Anomaly,” that appeared some years ago in the prestigious American Economic Review. The study found that stock market returns around the world are below-average on the Monday following shifts to daylight saving.
Since these below-average returns are the result of countless investors’ individual decisions, it’s impossible to know what causes them. The study’s authors believe the culprits are the well-known “effects of changes in sleep patterns on judgment, anxiety, reaction time, [and] problem solving.”
Of course, the market doesn’t always fall on the Monday following the shift to daylight saving time. But it does more often than not — enough so, in fact, to satisfy statisticians at the 95% confidence level that what the study’s authors call the “Daylight Savings Anomaly” is genuine.
To be sure, you shouldn’t try to trade on this anomaly. Statistically significant though it is, its magnitude is nevertheless too modest to pay for transaction costs.
The reason to nevertheless highlight this statistical pattern is to remind us, once again, of how difficult it is for us to be objective and rational in our investments. We may think of ourselves as being motivated entirely by such virtues. But the overwhelming evidence is that, in a head-to-head contest between our intellects and our emotions, it is the latter that almost always wins out.
The Daylight Savings Anomaly is just one example. If its existence isn’t enough to convince you of the subtle ways in which your emotions get the best of your intellect, consider the following equally sobering studies:
• “Sports Sentiment and Stock Returns” was conducted by Alex Edmans of the London Business School; Diego Garcia of the University of North Carolina (Chapel Hill); and Oyvind Norli of the BI Norwegian Business School. The researchers found that, on average, a given country’s loss in the World Cup elimination stage is followed by its stock market the next day producing a return that is significantly below average.
• “Good Day Sunshine: Stock Returns and the Weather” was conducted by David Hirshleifer of the University of California, Irvine, and Tyler Shumway of the University of Michigan. The researchers found that a country’s stock market performs significantly better on days when the sun is shining on its leading stock exchange.
• “Are Investors Moonstruck? Lunar Phase and Stock Returns” was conducted by Lu Zheng of the University of California, Irvine; Kathy Yuan of the London School of Economics; and Qiaoquia Zhu of the Australian National University. The researchers found that “stock returns are lower on the days around a full moon than on the days around a new moon.”
The best way for investors to keep their emotions from overwhelming their intellects is to mechanically follow a preset trading plan. This plan should specify the precise parameters for determining which securities to buy and sell, and when, as well as how much to allocate to the various assets classes, such as equities and fixed income.
Once you have such a plan, then all you have to do is actually follow it. If learning that lesson is the outcome of this weekend’s shift to Daylight Saving Time, then the disruptions to your sleep will have been worth it.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com .
More: How permanent daylight-saving time would make all our lives better