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Economics & Finance

Market moves: Not what you learned in B-School

Nicholas Bray |

Worried about your stocks portfolio? Amid today’s wild market gyrations, it can be hard to get a grip on what, exactly, causes moves in share prices. Here are some price-movers that are decoupled from the economy, but still have an impact.

Revolutions, recessions, natural disasters: they all have an impact on share prices. Corporate profits and losses, obviously, as well. But what about more obscure factors, like whose byline appears on a widely read financial column, or the outcome of a soccer match, or where Saturn’s orbit around the sun takes it in relation to Uranus and Pluto?

Skeptics may scoff, but such questions are a subject for serious academic study and are not without some empirical support. “Price formation is based not just on evidence and analysis but also on the psychology of hopes and fears,” says Joel Peress, Associate Professor of Finance at INSEAD, who confesses to a fascination with the ways in which prices are formed. “When you value an asset, you don’t just care about cash flows. You also care about what the market thinks. What you are willing to pay today will depend on what you think the market will think tomorrow.”

Is a journalist known for an upbeat writing style due to publish a market-watch column? In a 2011 paper entitled “Journalists and the Stock Market”, four researchers at the University of North Carolina claimed to have identified correlations, positive and negative, between who signed the Wall Street Journal’s Abreast of the Market column over a 37-year time span and same-day and next-day market performance. Knowing whose byline to look for, they asserted, can help in predicting market returns.

Non Sequiturs

Is a big soccer match in the offing? Then brace yourself for share price falls. According to the authors of a 2007 article in the Journal of Finance entitled “Sports Sentiment and Stock Returns”, defeat for a national team can prompt stock market losses unrelated to objective factors in a nation’s economy. By contrast, they identified no parallel market gains in winning countries. Thus, a money-making strategy could be to short futures on both competing countries’ stock market indices before an important match, to exploit the asymmetry of the outcome’s impact.

What about the weather? A sunny day on Wall Street is known to encourage increased trading volume, according to Peress. But that’s not all. In “Good Day Sunshine: Stock Returns and the Weather”, a 2003 article in the Journal of Finance, researchers from two US institutions claimed that share price movements between 1982 and 1997 in the main stock markets of 26 countries revealed links between morning sunshine and higher average daily market index returns that they described as “difficult to reconcile with fully rational price setting”.

And then there’s the moon. In a 2006 article in the Journal of Empirical Finance entitled “Are investors moonstruck? Lunar phases and stock returns”, three University of Michigan researchers claimed to have found a “significant cyclical lunar pattern in stock returns” using data from 48 developed and emerging country markets. Around the time of the full moon, they reported, stock returns tended to be lower than around the time of the new moon.

The calendar effect

So why did the Dow Jones Industrial Average index commence a straight week of gains on September 12 2011, the day of the September full moon, bucking both the moon and the well-known “Monday effect”? Could it be that the market had been oversold during the previous few weeks of turmoil. Or were some investors trying to make a quick buck by buying stocks on Monday in the expectation of being able to sell them at a profit later in the week?

Since the early 1980s, according to Peress, financial analysts have been aware of a tendency for market returns to weaken at the start of a week. That’s just one of many “calendar effects” that portfolio managers routinely take into account when planning investment strategies. Interestingly, however, says Peress, “the Monday effect has shrunk a lot since it was first documented in the finance literature. This suggests that smart professional investors who learned about the anomaly traded on it, thereby reducing or even eliminating it.”

Gloom and doom

Whatever the case, for those who follow the planets, August’s savage stock market sell-off came as no surprise. For years, financial astrologers had been forecasting pandemonium around this time. The cause? A “Saturn-Uranus-Pluto T-square”, in which Saturn and Uranus have moved to positions diametrically opposite each other in the heavens, with Pluto perpendicular to their axis.

The conjunction of these three celestial bodies, if astrologers are to be believed, has already prompted uprisings in North Africa, an earthquake and tsunami in Japan and riots in the United Kingdom. And the buzz in the star-gazing community is that things will get worse before they get better. Over the next few years, according to astrological websites, the world faces breakdowns in social order, uprisings against authorities, stock market slumps and the destruction and rebuilding of economic and social structures.

Where does this leave the investor? For a start, says Peress, forget the classic presumption that all available information is immediately reflected in market prices. “There are powerful forces towards efficiency, essentially stemming from investors’ profit-maximising behaviour, but markets are not perfectly efficient. Anomalous patterns persist, often affecting smaller and less liquid stocks where such patterns tend to be more costly to correct.”

Looking ahead, investors may wish to bear in mind this thought from American astrologer Bill Herbst. “At this point,” he told readers in a recent post on his website, “uncertainty is the order of the day. All we can be sure of is that life will change in the decade ahead.” The last time the world saw a similar Saturn-Uranus-Pluto configuration, he noted, was in the early 1930s at the time of the Great Depression. We know what happened next.

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