FED WATCH: Sun Storms Stand As Enemy For Unaware Stocks
04 Mar 14:42
By Michael S. Derby
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Thinking of investing in the stock market? The first
call you may want to make is to an astonomer rather than a stockbroker.
New research published by the Federal Reserve Bank of Atlanta says storms on
the surface of the sun which explode into space and then hit the Earth's
atmosphere exert an undeniable influence over the direction of the stock
market. The paper was authored by economists Anna Krivelyova of Boston College
and Cesare Robotti of the Atlanta Fed.
They've found that spikes in what they call geomagnetic storms tend to
increase investor anxiety levels and weigh on stock market prices as a result.
"The previous week's unusually high levels of geomagnetic activity have a
negative and statistically significant effect on today's stock returns for
seven out of nine countries" and across a wide range of stocks, including those
traded on the Nasdaq and New York Stock Exchange, the authors noted.
At the same time, when these geomagnetic storms are at a low point, the
analysts found "evidence of substantially higher returns around the world."
Geomagnetic storms in the Earth's atmosphere are caused by explosions of
plasma on the surface of the sun. Peak season for the storms comes between
March and April, and between September and October.
Most of the time, the explosions on the sun and their aftermath miss the
Earth entirely, but sometimes they don't. The storms, typically lasting for two
to three days, are responsible for phenomena like the ethereal Northern Lights
- rapidly shifting patches and dancing columns of light of various hues.
Small Stock Hazard
The impact of the storms on equity markets tends to be felt more in
small-capitalization stocks than anywhere else, the researchers said.
"We rationalize this finding by noticing that institutional ownership is
higher for large (capitalization) stocks," which leaves those securities more
insulated from the sort of mood swings the storms induce in individuals, the
paper said.
Perhaps in anticipation of the skeptics, the economists note there's an
established history of the effects of geomagnetic storms in engineering and
medical fields. They point out such storms pose major problems for satellite
operators and even for the durability of oil pipelines in Alaska. Health
authorities in countries bordering the Arctic regularly issue health alerts
during times of increasing storm frequency.
"There seems to be a direct causal relationship between geomagnetic storms
and common depressive disorders," the paper said. At its most basic level, the
geomagnetic storms reduce investor appetite for risk, and thus the tolerance
for buying stocks.
Before investors start eyeing the heavens however, the researchers, while
able to conclude that storm-free days bring "substantially higher" returns
versus those under stormy stretches, ran into trouble trying to create a viable
trading strategy.
"Even if geomagnetic storms are predictable, their frequency, intensity, and
persistence varies over time," the paper said. Adding to the challenge, "stock
returns are substantially lower during bad (storm) days, but remain mostly
positive on average."
Even with their difficulties, Krivelyova and Robotti say a strategy that
takes advantage of the geomagnetic storms could be created, employing
sophisticated financial hedging plays, or by using options on stock market
indexes.
The depressive impact on moods caused by the sun storms has echoes in another
unusual phenomena: the normal waxing and waning of sunlight through the year
also influences the course of the stock market.
Last year other researchers at the Atlanta Fed noted that periods of the year
in which days are shortest tend to bring the lowest returns in global stock
markets.
For now, at least, stock investors can stick to the fundamentals in making
their trading decisions. The National Oceanic and Atmospheric Administration's
Space Environment Center on Tuesday noted no unusual geomagnetic storm
activity, although it said a minor storm may be looming.
-Michael S. Derby, Dow Jones Newswires; 201-938-4192;
michael.derby@dowjones.com
(END) Dow Jones Newswires
03-04-03 1442ET |
