Summer is in full swing. A week of barbecuing, heat, and fireworks has just transpired for Canadians and Americans alike, and another fun summer awaits.
Most of us have noticed that during hot days, we just don’t feel like doing anything. There’s something about heat that makes us move a bit slower. Summer is a time for festivals, partying, and relaxing, not putting our noses to the grindstones.
But, barring those of us in school or working as teachers, summer doesn’t rid us entirely of work. A particularly intense heat wave puts a damper on our productivity rivaled only by the likes of Netflix.
What does this mean for the economy as a whole?
Air Conditioning and the Stock Market
A team from Beijing looked at economic performance in the context of our greatest weapon against the menacing heat: air conditioning.
Air conditioning was invented at the tail end of the 1800s. Within a mere 3 years of its origination, central air conditioning was built into the New York Stock Exchange building- one of the first in the world to feature such a system.
The New York Stock Exchange building as it neared completion in 1903, with one of the first ever central air conditioning units
The Beijing team looked at the Dow Jones Average (DJA) in the 18 year period before the installation of the air conditioning (1885-1903) and compared it to the 11 year period afterwards (1903-1914). The S&P was not established until 1923, and therefore came after the existence of central air conditioning.
In their model, they controlled for several important factors that are known to affect overall stock market performance. These are precipitation, the Monday effect, the May to October effect, whether the market is a bear or a bull, seasonality, the DJA of the previous day, and GDP.
Quirks of the Stock Market
Bull markets and bear markets are basically the ebb and flow of the economy. Bull markets are characterized by optimism, willingness to invest, and an overall upward trend that culminates in a ‘peak’. Bear markets are characterized by pessimism, reluctance to invest, and an overall downward trend that ends in a ‘trough’.
The Dow Jones Average between 1885 and 1914. Grey represents a bear market whereas white represents a bull market
Incidentally, these terms come from the way bulls and bears engage in combat- bulls swing their horns upward, while bears swing their paws downwards. Controlling for a bull/bear market is an essential aspect of economic research.
The Monday effect is self-explanatory. Mondays’ suck. Investors are not going to be as effective after a relaxing (hopefully) weekend, and this results in a lower Dow Jones Average on Mondays.
Some researchers have suggested that the Monday effect might be due to short-sellers finishing their activity at the end of the week, which is an interesting theory. Short sellers are traders that advise individuals and companies to sell their stock before an impending crash, rather than advising people to buy stock before an impending climb. These traders are human too, and it makes sense that they would want to wrap up their work at the end of the week, leading to more people selling stock than buying on a Friday evening (and a subsequent slowing of the economy on Mondays).
The Monday effect has persisted since the DJA has existed
Regardless, the Monday effect is well-documented in economic research. The other major temporal factor is the May to October effect.
This half of the year is markedly slower than November to April, in terms of economic growth. A prevailing theory states that this is due to differential vacation behavior; investors (humans in general) take more vacation days from May to October, leading to lower overall productivity.
Temperature Does Affect Stock Market Returns
For 90% of the world, May-October represents the hottest half of the year. Therefore, controlling for both seasonality and this time range is crucial to understanding the relationship between temperature and economic gains.
The Beijing team found that days with an average temperature of more than 30 degrees had a lower DJA than days with below that average, accounting for all the factors we’ve discussed so far. This was true both before and after 1903 (the air conditioning installation).
However, the effect was much more pronounced before air conditioning.
The team also looked at precipitation. Interestingly enough, rainfall dampened the negative effect of hot weather on the DJA, suggesting that rainy summer days are better for productivity.
A small nitpick- the authors suggested that rainfall might depress this relationship by lowering temperature, which is a feature of summer. But since temperature was a variable in the model, the effect of rainfall was independent of temperature- meaning that however rainfall mitigated the heat-induced lethargy, it did not do so by lowering temperature (it could be changes in humidity, added fresh air, even anticipation of lower temperatures- but not lower temperatures directly).
Kind of Scary Implications
Hot days do seem to be associated with a lower Dow Jones Average. And even though air conditioning mitigates this effect, it doesn’t entirely disappear. This suggests that global warming has yet another detrimental effect on the economy, by lowering overall productivity.
Indeed, a recent report by the International Labour Organization demonstrates that productivity in equatorial regions has been negatively impaired to due heat stress.
These effects are going to be felt disproportionately by poorer countries, reducing their ability to develop.
Weather and productivity are intrinsically linked. Seasonal Affective Disorder alone affects up to 9% of the population in some states, and this doesn’t account for most of our day-to-day mood fluctuations. We are just now beginning to explore what this means.
Sources:
Hou J, Shi W, Sun J (2019) Stock Returns, weather, and air conditioning. PLoS ONE
14(7): e0219439. https://doi.org/10.1371/journal.pone.0219439
Image of NY stock market exchange retrieved from https://fineartamerica.com/featured/new-york-stock-exchange-under-construction-1903-jon-neidert.html
Image of Monday effect retrieved from https://www.quora.com/During-which-months-of-the-year-does-the-stock-market-do-well
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