Can April showers bring third-quarter flowers? At least one researcher thinks that the link between meteorological conditions and investment performance is more than just a coincidence.
Lei Zhang, associate professor at the City University of Hong Kong, theorized in an academic paper published in February that on average, an institutional investor with a buy-and-hold portfolio can expect a 28-basis-point performance gain in the quarter immediately following a bad-weather quarter, as opposed to a three-basis-point loss after a period of good weather. Zhang speculates that during inclement weather, investors tend to pay better attention and spend more time perusing Edgar filings and conducting other research. This increased attention, he theorized, is why portfolios tend to outperform following rainy periods.
Zhang’s research is part of a broader field of study on the effects of weather on investors. In 2021, Institutional Investor covered one such paper, which showed that bad weather can have an immediate negative effect on an investor’s response to earnings news. But according to Zhang, his work is different, because it studies the portfolio-level, rather than stock-level, impact of harsh weather.
“It’s [the] typical research process — one project can lead to multiple new research directions along the way,” Zhang said via e-mail about the paper’s inspiration. “I have been working on a series of papers examining the impact of corporate exposure to cumulative abnormal weather conditions on bond yield spreads, analyst earnings forecasts, and the design of bank loan contracts.”
He explained that as he researched other topics, he came across recent psychology and labor economics advancements that showed — contrary to conventional wisdom — that rainy weather increases individual productivity. “Bad weather reduces potential cognitive distractions associated with outdoor leisure activities that can only be engaged in during good weather conditions,” the paper said. “Apparently, distracting thoughts related to salient outdoor options come to mind much more easily on good weather days than on bad weather days.”
This is especially the case when it comes to work that requires a high level of sustained attention and focus, such as investing on behalf of an institution.
Zhang used a Thomson/Refinitiv sample of institutional investors in the United States from 1999 to 2019, collecting historical headquarters locations of asset managers from 13F filings. He also obtained monthly county-level weather conditions from the National Climatic Data Center — using precipitation as the primary indicator of bad weather — as well as Securities and Exchange Commission information on the IP addresses of Edgar users between 2003 and 2017.
After running the data through a series of equations, Zhang found that, after adjusting for other characteristics, the bad-weather indicator was still associated, on average, with a 19-basis-point gain for an institutional investor portfolio in the following quarter. He also discovered a strong positive relationship between the attempt to access Edgar filings and the ownership of stocks purchased during bad periods of weather.
“These findings further corroborate the productivity-increase hypothesis, [which holds that] bad weather increases the cognitive capacity of asset managers [to conduct] more effective fundamental research, leading to more skillful portfolio-selection decisions,” the paper said.