How the Olympics Could Affect the Stock Market

The study that first reported that correlation, in 2007, was published in a prestigious academic journal, the Journal of Finance. Titled “Sports Sentiment and Stock Returns,” its authors were

Alex Edmans

of the London Business School; Diego García of the University of Colorado Boulder; and Oyvind Norli of the Norwegian School of Management.

Prof. García emphasizes that the authors’ findings were based on an average of thousands of international sports competitions, focusing on World Cup soccer matches, cricket competitions and the Olympics—whose contest-jammed schedules guarantee there to be losing nations every day. There is no guarantee the correlation will hold up in any one instance. In any case, he adds, it’s not clear that, even if the stock market is a below-average performer over the next two weeks, it will underperform by enough to pay for the transaction costs involved in selling stocks now and buying them back after the Olympics are over.

But that’s beside the point of their research, since they aren’t recommending that we become short-term traders. The investment lesson to draw from their results, Prof. García says, is the difficulty we have preventing our moods from influencing our investment decisions.

After all, there is no rational reason why the outcome of a sports event should have anything to do with the stock market. Yet, he says, he and his fellow researchers found clear evidence that “investors in the country whose team loses become gloomy, and as a consequence more pessimistic about equities’ potential, leading that country’s stock market to perform poorly the following day.”

The researchers found no corresponding increase in the performance of the stock market in countries whose teams won international competitions. This asymmetry between the stock market impacts of winning and losing is why, during multiple-day international competitions with many events, the global stock market tends to be a below-average performer.

It’s doubtful that any of the investors who became gloomy after their teams lost were aware that their mood was affecting their portfolio decisions. We invariably consider ourselves to be entirely rational investors, objectively analyzing the data and assessing the probabilities. That’s why a study documenting a correlation between sports sentiment and the stock market is noteworthy.

There is no shortage of additional examples that remind us that objectivity and rationality are honored more in the breach than in their observance:

• One is that stock markets tend to perform better during trading sessions that take place when the sun is shining. Research confirming this result 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. Prof. Shumway says that this result “almost certainly is evidence of our mood affecting our investment behavior, since it’s difficult to imagine that one day’s sunshine has 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 in the days around a new moon than around a full moon. Research documenting this correlation appeared in the Journal of Empirical Finance, written by

Kathy Yuan

of the London School of Economics;

Lu Zheng

of the University of California Irvine; and

Qiaoquia Zhu

of the Australian National University. Prof. Zheng says, “It’s difficult to tell a story in which the lunar cycle has a rational connection with corporate profitability.” She says that 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, forthcoming in the Journal of Financial Economics, discovers a correlation between the performance of a country’s stock market in a given week and whether the most-listened-to songs on Spotify in that country that week are happy or sad. The study was conducted by Prof. Edmans;

Alexandre Garel

of France’s Audencia Business School; and

Adrian Fernandez-Perez

and

Ivan Indriawan

of New Zealand’s Auckland University of Technology. The researchers were able to uncover this correlation because Spotify not only keeps track of listening data for each country, it also employs an algorithm that classifies every song as happy or sad. Prof. Edmans says that he and his co-authors “also showed that the stock market rose the day after a nation listens to happier songs, suggesting that music listening choices drive the stock market, rather than the stock market driving listening choices.”

The best antidote for preventing your emotions from affecting your investment decisions is to devise, in advance, the strategy you will follow with each stock, bond or fund you intend to purchase. Thereafter your job is to follow your strategy. That sounds simple enough, but will be difficult when it calls for you 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 flat fee to be audited. He can be reached at reports@wsj.com.