This week, millions of Americans were treated to the rare sight of a total eclipse of the sun. Eclipses happen regularly – up to five times per year – but the last time an eclipse as spectacular as this one could be seen from coast to coast in the US was in 1918. Why should investors care about this? Because, as Mark Hulbert points out on MarketWatch, some believe that stock market activity can be affected by astronomical events.
A 2001 study by US researchers David Hirshleifer and Tyler Shumway suggested that returns at 26 global stock exchanges tend to be better on sunny days, for example. Other studies have found that “seasonal affective disorder” – depression caused by falling daylight levels in the winter – appears to affect returns too. And it’s not just the sun – according to another 2001 study by Lu Zheng at the University of California, Kathy Yuan at the LSE, and Qiaoqiao Zhu at Australian National University, returns are significantly lower around a full moon than around a new moon.
Then, notes Bloomberg, there’s the “Puetz Crash Window” – named for Steve Puetz, who coined the idea. Puetz argues that some of the biggest crashes in history have occurred on or around a full moon – or preferably a lunar eclipse – that comes within six weeks of a solar eclipse. Stocks do need to be overvalued in the first place, though, he notes: “You need a bubble to have a crash, but when a bubble forms, they tend to crash near the time of a lunar eclipse.”
Clearly, the physical environment affects prices – you need only look at how weather conditions affect the “soft” commodities market, for example. And levels of sunshine and daylight certainly affect moods. So it’s perhaps not a huge leap to imagine that the motion of the planets might affect human behaviour, and thus markets, in some way.
However, before you rush out to check your lunar calendar and the weather forecast, more recent reviews (including a 2016 paper from Jae H Kim at La Trobe University in Australia) suggest that the design of many “weather effect” studies is fundamentally flawed – in effect finding patterns where there are none, due to the huge sample sizes used.
So can we expect the market to topple in the wake of Monday’s eclipse? Hulbert dug into the data himself – and found no relationship. Looking at 13 total solar eclipses that were visible from at least some part of the US, he found no correlation with turning points in the market. Stocks might well be overvalued, or bonds might indeed be in a bubble – but if a crash begins imminently, it won’t be because the moon has just briefly and predictably drifted in front of the sun.
Does astrology really work?
“Millionaires don’t use astrologers. Billionaires do.” Versions of this quote are widely attributed to JP Morgan, who is believed to have regularly consulted one of America’s first celebrity astrologers, Evangeline Adams, for her views on the markets. Morgan certainly wasn’t alone – Adams made a good living from her astrological newsletter, right up until her death in 1932.
The fascination continues today – several popular newsletters claim to be able to forecast the movements of stocks by looking at the motions of the stars, including The Merriman Market Analyst, Crawford Perspectives and Rosecast Market Timing.
Is there anything to it? According to newsletter reviewer Mark Hulbert, on average, the track record of astrologers is no worse than that of technical or fundamental analysts.
However, that probably says a lot more about the rarity of genuine forecasting ability in general – given the sheer range of variables involved, attempting to time the market using any sort of model, from one based on economic data to one based on chicken entrails, is a triumph of hope over experience. Any analysis based on cyclical phenomena is likely to generate the occasional striking result, given that stock markets and economies are cyclical too.
One thing’s for sure – Morgan didn’t get rich through astrology. One of Adams best-known forecasts was a prediction that “stocks might climb to heaven” a few weeks before the 1929 crash. It’s no worse than the similarly ill-timed pronouncement of respected economist Irving Fisher that “stock prices have reached what looks like a permanently high plateau”, but it does rather nicely summarise the evidence that, in scientific terms at least, astrology is no more respectable than economics.
• This article is taken from this week’s issue of MoneyWeek magazine. If you haven’t already, sign up to get your first 12 issues for £12.