How the Olympics Could Affect the Stock Market

The study that first reported this correlation, in 2007, was published in a prestigious academic journal, the Journal of Finance. Entitled “Sports Sentiment and Stock Returns”, its authors were Alex Edmans of the London Business School; Diego García of the University of Colorado at Boulder; and Oyvind Norli from the Norwegian School of Management.

Professor García points out that the authors’ conclusions were based on an average of thousands of international sports competitions, focusing on World Cup football matches, cricket competitions and the Olympics, whose busy competition schedules guarantee that there will be losing nations every day. There is no guarantee that the correlation will hold in any given case. In any case, he adds, it is not clear that even if the stock market performs below average over the next two weeks, it will underperform enough to pay the related transaction costs. selling shares now and buying them back later. the Olympics are over.

But that is not the purpose of their research, as they do not recommend that we become short-term traders. The investment lesson to be learned from their results, according to Professor García, is the difficulty we have in preventing our moods from influencing our investment decisions.

After all, there is no rational reason for the outcome of a sporting event to have anything to do with the stock market. Yet, he says, he and his fellow researchers have found clear evidence that “investors in the country whose team is losing are becoming gloomy and, therefore, more pessimistic about the potential of stocks, which is driving the stock market this country to perform poorly the next day”.

The researchers found no corresponding increase in stock market performance in countries whose teams won international competitions. This asymmetry between the stock market impacts of gains and losses is why, in multi-day international competitions with many events, the global stock market tends to perform below average.

It’s doubtful that the investors who turned gloomy after the loss of their teams were aware that their mood affected their portfolio decisions. We invariably see ourselves as entirely rational investors, objectively analyzing the data and weighing the odds. That’s why a study documenting a correlation between sports sentiment and the stock market is remarkable.

Additional examples are not lacking to remind us that objectivity and rationality are more honored in the breach than in their observance:

• The first is that stock markets tend to perform better during trading sessions that take place when the sun is shining. Research confirming this finding was also published in the Journal of Finance, titled “Good Day Sunshine,” by David Hirshleifer of the University of California, Irvine and Tyler Shumway of Brigham Young University. Professor Shumway says the result “is almost certainly evidence that our mood affects our investment behavior, as it’s hard to imagine a sunny day having any real impact on a country’s economy”.

• Another fascinating example is based on lunar rather than solar cycles: the stock market on average tends to perform better on days around a new moon than around a full moon. Research documenting this correlation has been published in the Journal of Empirical Finance, written by Kathy Yuan of the London School of Economics; Lu Zheng of the University of California at Irvine; and Qiaoquia Zhu from the Australian National University. Professor Zheng says, “It is difficult to tell a story in which the lunar cycle has a rational connection to corporate profitability. She says there are “a number of psychological and biological studies showing a correlation between the lunar cycle and our moods, which suggests that it could be this emotional channel through which the lunar cycle affects the stock market.”

• A third study, to be published in the Journal of Financial Economics, finds a correlation between a country’s stock market performance in a given week and whether the top songs on Spotify in that country that week are happy or sad. The study was conducted by Professor Edmans; Alexandre Garel from the Audencia business school in France; and Adrian Fernandez-Perez and Ivan Indriawan from Auckland University of Technology in New Zealand. The researchers were able to uncover this correlation because Spotify not only tracks listening data for each country, it also uses an algorithm that classifies each song as happy or sad. Professor Edmans says he and his co-authors “also showed that the stock market rose the day after a nation listened to happier songs, suggesting that music listening choices dictate the stock market, rather than the stock market dictating listening choices”.

The best antidote to prevent your emotions from affecting your investment decisions is to design, in advance, the strategy you will follow for each stock, bond or fund you intend to buy. Thereafter, your job is to follow your strategy. It sounds simple enough, but it will be difficult if you have to do something you don’t feel like doing.

The alternative – following the lead of your emotions – is surely worse.

Mr. Hulbert is a columnist whose Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at reports@wsj.com.