Stock prices have been on the rise, tempting cautious investors to plunge back into the market. If you are one of them, you might consider this unconventional piece of advice:
Buy low, sell smoggy.
That’s the implication of a study conducted by two Israeli scholars published in the Journal of Economic Psychology. They report poor air quality in the vicinity of the trading floor "is negatively related to stock returns, even when controlling for other variables."
Tamir Levy of Netanya Academic College and Joseph Yagil of Haifa University note that exposure to polluted air can trigger depression, anxiety and anger in some people. When a significant number of investors experience these negative emotions, this "may lead to a collective change in the level of risk aversion, resulting in lower stock returns," they write.
"These findings lend support to the relationship between air pollution and mood established by psychologists, and the relationship between mood and economic consequences established by economists," they add. "Mood has an impact on decision-making, one type of which is an investment in stocks."
Levy and Yagil examined daily data on stock returns for an entire decade — from Jan. 1, 1997 to June 30, 2007. They looked at five leading indices: The S&P 500, the Dow Jones Industrial Average, the NASDAQ Composite Index, the AMEX Composite Index and the Philadelphia Stock Exchange Utility Sector Index.
The researchers compared those figures to the Air Quality Index reports for Philadelphia and Kings County (Brooklyn), the station closest to the New York exchanges. They specifically noted whether each day’s air quality was considered good or unhealthy.
Air quality reached unhealthy levels on only 1.43 percent of the approximately 2,600 trading days examined in New York, and 1.65 percent of the days in Philadelphia. Those were not good days for joggers, asthmatics — or the markets.
"The mean daily return for unhealthy days is statistically negative for all five stock indices examined," the researchers report. In contrast, during days with acceptable air quality, "the mean daily stock return … is positive and generally not statistically significant."
Interestingly, the scholars also found an association between bad air days in New York and negative stock returns in Philadelphia. They surmise this is "probably due to the trading on that exchange conducted by New York traders."
"One implication of this study is that if air pollution is negatively related to stock returns, one can devise an investment strategy that can lead to abnormal profits," the researchers write. If you can successfully predict which days will have poor air quality — not an impossible task, given that certain weather patterns make bad air more likely — you can proceed on the likelihood that the market will end the day lower than it began.
In fact, if you use one of two pollution prediction methods, "We have shown that the rate of return generated by the suggested strategy is much higher than the return obtained under the simple buy-and-hold policy, even when accounting for transaction costs," they conclude.
Of course, with more and more trading being done by computers — who are, presumably, oblivious to smog levels — this strategy may not work for long. In the meantime, investors are well advised to keep current on climatic conditions in lower Manhattan.