Policy Genius recently featured R Persichitte in their article about how investors’ moods affect the stock market.
The short answer is that a long-term investing strategy paired with your ability and capacity to handle risk is the right strategy for most investors.
A recent study questions how efficient the stock market is when seemingly insignificant events can disrupt it. They show that short-term market returns have a relationship to the sentiment of popular music. In other words, if the radio is playing sad songs, investment values go down.
If this makes you feel like the stock market is random, not so fast. There are two reasons to keep your faith.
Long-term and short-term trends are different
The study claims that while people listen to happier music, the market experiences a higher weekly return. However, this study doesn’t talk about the impact in the long term. For most financial goals, planners consider returns over five or more years—not over a single week. Imagine trying to predict your mood five years from now based on a song you listened to this morning!
This isn’t arbitrary.
By using music to measure the mood of everyone, the paper is trying to measure consumer sentiment using music tastes. Investing based on consumer sentiment is a rational investment strategy. The paper Sentiment and the U.S. business cycle by Fabio Milani claims changes in consumer sentiment caused over 40% of the historical fluctuations U.S. business cycle. People who are scared about the future spend and invest differently. Their new behavior affects the economy, which affects the stock market’s return.