The stock market gets SAD in winter, too

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When the mercury drops and daylight hours dwindle, winter blues set in for many people.

Financial analysts are no exception, according to new UBC Sauder School of Business research, which found that seasonal affective disorder (SAD) also has an impact on the stock market.

In this Q&A, Kin Lo, the study’s senior author and UBC Sauder associate professor, explains the effect of SAD on financial analysts and why investors should consider the season when making investment decisions.

How does SAD affect financial analysts?

We found that financial analysts become more pessimistic with the onset of seasonal affective disorder in the fall. When they issue forecasts for companies’ profits for the coming quarter, for example, they tend to revise them downwards more in the fall than in other seasons of the year. Their forecasts also become less precise. Furthermore, we found that they are less willing to take a bold position that is much more optimistic than most other analysts, and are more likely to provide an opinion that is extremely pessimistic compared to the rest of the herd. These behaviours are consistent with symptoms of SAD.

How did you carry out this research?

We took a comprehensive sample of American companies and analyzed the forecasts that analysts had issued regarding their quarterly earnings over a 10-year period. Analysts revise these forecasts as time goes on. We tracked these forecast revisions and identified the seasons in which they occurred. Looking at the revisions issued in the fall compared to other seasons, we were able to document that the fall season revisions had the characteristics consistent with analysts being affected by SAD.

For such a large sample, it was not feasible for us to obtain medical diagnoses of SAD for all these analysts, so this evidence is circumstantial. However, we do have a strong piece of evidence that what we found is connected to SAD. We know from the medical literature that a small segment of the population suffers from SAD, a larger segment experiences milder symptoms we commonly call the “winter blues,” while the majority of the population does not exhibit significant symptoms at all. In other words, the symptoms of SAD do not appear randomly in different individuals from year to year, but rather they appear in the same individuals over and over (unless treated).

In our study, we were able to track the forecast revisions according to the specific analyst, and we were able to show that the effects persist from year to year for specific analysts. 

Why is it important to understand the effect of seasonal affective disorder on financial analysts?

Financial analysts play an important role in the stock market. Their opinions can move stock prices up or down. Understanding that some of them tend to be unduly pessimistic during the fall season helps investors interpret those opinions and adjust accordingly to make better investment decisions. Looking at financial analysts specifically, rather than stock prices or stock returns, which previous research did, provides the opportunity to analyze the effects of SAD on financial markets at the individual level. Being able to document individual-specific effects is much more precise than documenting an average tendency for a population, provide more convincing evidence connecting SAD to seasonal patterns in stock markets.