The Weather & Your Investments

I’m sure it must seem odd that a wealth management company would be talking about the weather. Believe it or not, the weather can significantly impact the stock market and your investments. 

Weather affects many aspects of your life—from travel plans to whether you’ll run errands, the types of insurance you purchase for your home and vehicle, and where you move once you reach your retirement age. If you live in California, you might have heard of the IRS pushing the due date for tax returns a whole six months because of the weather!

In short, weather affects the way we invest our time and money. And investors are no different.

How weather affects investments

The impact of weather on investments will depend on various factors, including the type of investment, the severity and duration of the weather event, and the ability of companies to adapt to changing conditions. Investors should consider the risks and opportunities associated with weather-related events when making investment decisions.

Overall, the weather has two primary types of effects on investments: direct and indirect.

Direct effects of weather on investments

Direct effects of weather on investments can be seen in industries such as agriculture and energy, which are particularly sensitive to weather conditions. For example, a drought or a flood can affect crop yields, leading to lower revenues for agricultural companies and potentially causing commodity prices to rise. Similarly, extreme weather events like hurricanes or winter storms can disrupt energy production, transportation, and distribution, leading to higher prices for energy commodities. This could cause a drop in the stock prices of energy companies, and their investors could lose money.

Indirect effects of weather on investments

Indirect effects of weather on investments can also occur, as weather can influence consumer behavior and overall economic activity. For example, severe weather events can disrupt travel and tourism, leading to lower revenues for companies in the hospitality and entertainment sectors. Extreme heat or cold can also affect consumer spending patterns, as people may be less likely to go out and shop or dine in certain weather conditions.

In addition, weather-related news coverage can impact investor sentiment and market volatility. For example, suppose a severe weather event is expected to impact a major economic region. In that case, it can lead to increased uncertainty and volatility in the stock market, as investors may be unsure about the potential impact on earnings and overall economic growth. Some banks also increase their interest rate spread following disasters related to climate change.

How do I make investment choices based on the weather?

Investing based on weather requires careful analysis and research. Here are some strategies that investors may consider when looking to invest based on weather:

Invest in weather-sensitive industries

As mentioned earlier, agriculture, energy, and insurance industries are susceptible to weather conditions. Investing in companies that operate in these industries may provide exposure to the potential opportunities and risks associated with weather-related events.

Follow weather patterns

Tracking weather patterns can provide insight into related risks and opportunities. For example, if a drought is expected, investing in companies specializing in drought-resistant crops or irrigation systems may be a way to profit from the situation.

Analyze historical weather data

Examining historical weather data can also provide insights into related risks and opportunities for certain industries or companies. For example, if a company has experienced significant losses due to weather-related events in the past, it may be vulnerable to similar events in the future.

Consider climate change

Climate change is expected to impact weather patterns and potentially create new investment opportunities and risks. Investors may want to consider investing in companies working to address climate change or developing technologies to adapt to changing weather patterns.

Set time horizons

A “time horizon” is the period of time you expect to keep the investment. Generally, the longer the time horizon, the more risk you can undertake. Understanding time horizons can help you leverage time to your advantage.

As you research, you can move your investments around to various stocks, bonds, index funds, and mutual funds. Those interested in low-risk earnings on their cash might even open a high-yield savings account. Each of these investment options might be impacted differently by the weather. By diversifying in this way, you can use time horizons to help meet short-term and long-term goals.

For instance, you might move some short-term investments away from companies likely to see losses from the coming weather. You can then put that money into companies that might benefit greatly from the coming weather for potential short-term gains. But you might also choose to keep some long-term investments in those companies that expect losses and ride out the risk.

Invest in ESG funds

The S&P 500 index offers an ESG fund option. “ESG” stands for “Environment, Social, and Governance” and focuses on companies that meet certain sustainability criteria. It works much like the OG S&P 500, so investing in this fund can offer you the benefits of investing in sustainability-forward businesses with relatively low risk. Some companies are now offering ESG investment options for some of their retirement benefits. So, consider researching or asking about your options if this interests you.

Seek professional advice

Investing based on weather can be complex and requires specialized knowledge. Seeking advice from a professional financial advisor who specializes in weather-related investing can help investors make informed decisions. If you have a brokerage account, you can speak to your broker about your concerns for advice or ask them how the weather and climate change impacts the way they invest your money.

Take steps to mitigate risks

It’s important to remember that investing involves risks and that past performance does not indicate future results. Before making any financial decisions based on the weather, investors should:

• Conduct thorough research
• Consult with a financial professional
• Create specific financial goals and investment objectives
• Carefully consider their risk tolerance level