What’s to blame for some of the ugliest periods for stocks? Your kids. Seriously, that’s what a group of researchers from three universities including MIT have found.
Stock prices tend to do the worst during periods following long school vacations, according to new research by Massachusetts Institute of Technology Visiting Professor Lily Fang.
Specifically, stock market returns are 1 percent in the months following major school holidays, the researchers found. And don’t just blame U.S. children. The “after holiday effect” occurs worldwide, the researcher found by studying market returns following major school breaks in 47.
Why could this happen? There’s an “after holiday effect” where stocks suffer as investment professionals go back to paying attention to the markets instead of their children, says Fang, who did the research with Chunmei Lin of Erasmus University and Yuping Shao National University of Singapore.
Does hanging out with kids put traders in a bad mood? Just the opposite. Since traders are distracted during vacations, the market’s value can drift higher from where it should be. That means the market comes under pressure when traders return to focus—and sell off stocks based on bad news they might have missed while playing with their kids, Fang says.
The after holiday effect is largely negative because it’s the bad news that gets largely missed during school breaks. Short sellers—who normally look for negative news and are a big factor in pulling stock prices down—need to be focused.
“Bad news travels slowly,” Fang says. “It is more difficult, and requires even more attention, to take advantage of bad news than good news.”
The biggest period of the effect was seen in the U.S. after summer vacation. Traders who normally would be trying to find companies in trouble to bet against stocks are busy making sand castles. This factor is a big reason why September, the first month of busy trading after the summer, tends to be negative, Fang says.
“The main lesson here is that attention is a limited resource,” says Fang. “We make the unrealistic assumption that since traders are professional investors, they are super machines with infinite attention spans. But the fact is: human beings are human beings.”