It’s fair to assume all the hard data we have on financial markets can tell us something about how the stock market will move: Interest rates up? Stocks down. Profits up? Stocks up!
But emotions can also move the markets. New research, set to be published in the Journal of Financial Economics, sought to measure how mood affects a country’s stock market performance. But how to measure a country’s mood? As the poet Kahlil Gibran wrote, “Music is the language of the spirit.”
The researchers turned to Spotify, which collects lots of data on what people listen to and uses an algorithm to measure whether a given track is happy or sad.
“We used music as a proxy of mood because there is literature that says when you feel sad, you tend to listen to more sad music, and when you are happy, you tend to listen to happier music,” says Adrian Fernandez-Perez, a senior research fellow at Auckland University of Technology. Fernandez-Perez co-authored the paper with Ivan Indriawan, also of Auckland University of Technology, Alex Edmans of London Business School, and Alexandre Garel of Audencia Business School.
They found that when people listen to more happy music, the stock market tends to do better. Or, as they put it in the paper: “We find a positive and significant association between music sentiment and contemporaneous returns, controlling for past returns, the world market return, seasonalities, weather conditions, and macroeconomic variables.”
So that’s nice to know. But can you actually incorporate this information into your investing strategy?
How sentiment plays a role in investing
There’s a big caveat to these findings. While a week of happy music is associated with a week of happy stock market returns, there’s an opposite association the following week, suggesting that markets correct themselves over time. That suggests investing over the long term is a safer way to make money.
“In the short-term, you see these moves in the stock market, and they seem irrational,” says Robert Persichitte, a financial advisor for Delagify Financial.
But if you zoom out, the market looks more predictable. Take a look at a chart for the Wilshere 5000, an index of all U.S. stocks. There are some bumpy years, but over the decades, the line climbs up and to the right.
If your goal is long-term wealth building, the short-term fluctuations of the market, whether they’re based on music or weather or the winner of the Super Bowl, shouldn’t matter so much. But if you’re trying to make a quick buck, it’s possible that knowing that everyone around you is listening to happy music can inform your investing decisions. Professional investors take consumer sentiment into account when they’re making investments, Persichitte says. But they have a lot more time and incentive to research their bets than most people.
“It’s not something for the faint of heart,” says Leibel Sternbach, a financial advisor and author of Living with Financial Anxiety.
The stock market may be driven by investors’ emotions, but you don’t have to invest for emotional reasons, Sternbach says. If you can remind yourself that you’re investing to build wealth over a long period of time, that can shield you from the short-term, risky decision making that can lead to losses.
“If you ’re investing for emotional reasons, like you think the market is going to go down or the market is going to go up,” Sternbach says, “it’s no different than speculating or gambling.”
Do that for long enough, and you’ll end up facing the music.
Image: MoMo Productions / Getty Images
