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Stranger things

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DOUG  By Guest Blogger Doug Rowat
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Unusual things can affect financial outcomes.

Recent proof is Elon Musk’s Saturday Night Live appearance, which caused the wacky cryptocurrency Dogecoin to plunge 30% after he called it a “hustle” in one of the show’s skits. Wall Street analysts were, bizarrely, forced to write commentary on Musk’s SNL hosting performance (as if meaningful insight could be gleaned from it).

And more proof that the unusual and rarely contemplated can affect finances? If you’re applying for a bank loan, you should probably apply after lunch. According to a Cambridge University study, bank credit officers are more likely to reject loan applications just before their lunch break. It seems ‘decision fatigue’ or the tiredness caused by making many difficult decisions over a long morning (and maybe with a growling stomach) tilts loan officers more often towards the safer decision (i.e., denying the credit application). One of the Cambridge researchers concluded that even decisions that we assume would be entirely objective are actually “influenced by psychological factors”.

There are many other examples of odd “psychological factors” influencing financial outcomes. Sunny days, for example, affect stock market returns. In their now-famous research paper, “Good Day Sunshine: Stock Returns and the Weather”, researchers Tyler Shumway and David Hirshleifer determined, after looking at the market data and weather patterns across 26 cities from 1982 to 1997, that a sunny start to the day had a strong, positive correlation to equity market returns and led to more favourable market outcomes. Another example of how something that theoretically should have no impact on the objective fundamentals and therefore no impact on results…somehow does.

And, as I’ve noted before on this blog, Jason Zweig in his book, Your Money and Your Brain, highlights that outcomes of sporting events also impact the markets. Losing an important World Cup soccer match, for instance, usually means that the home market of the losing team will underperform the next day. Subtly, how we feel about a sporting event influences our investing behaviour.

The Summer Olympic Games in Tokyo, Japan are now only about three months away after being postponed last year and, God willing, Covid won’t derail them again. I looked at all the Olympic Games of the modern era, both summer and winter, dating back to 1988. A total of 17 Games in all. Sure enough, during the two-week period of the Games themselves, the market of the host country traded higher more than 70% of the time (the S&P 500 was up more than 75% of the time) and had an overall average total return of 1.4% (not bad for 2 weeks). Naturally, no one should ever ‘trade’ the Olympics, but the psychological influence is interesting to consider.

Market returns During Past Olympics

Click to enlarge. Source: Bloomberg, Turner Investments

And the list of oddball market-influencing factors goes on. It’s been said, for instance, that butter production in Bangladesh has the highest correlation of any variable to the S&P 500. Then there’s the ‘unclaimed corpse indicator’, the theory here being that some individuals don’t claim the bodies of loved ones from the morgue because of cost—therefore when the level of unclaimed corpses rises, a recession is imminent.

In short, the world’s filled with curious and rarely considered forces that may affect your finances. But most of these factors, even if they have some merit, are pointless to actually act on (are you going to day-trade sunny mornings? Elon Musk SNL appearances?). The secrets to long-term financial success—balance and diversification, low-cost investments, low turnover and a global focus—are always straightforward, never quirky.

Still these peculiar market-influencing variables are probably always at work in the background. And with summer coming, and the Olympics around the corner, who knows? A bit of sunny weather and a few weeks to pause and cheer our Canadian athletes may not only help us forget about Covid for a while, but may also lift our portfolios.

And next time, bring your banker a donut along with your loan application. It’s worth a shot.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.



Source: https://www.greaterfool.ca/2021/05/15/stranger-things/


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