In-depth Analysis

The Valentine Effect

Financial markets probably aren’t something most of us would associate with Valentine’s Day. Despite the passions triggered by trading, such emotions belong to a different dimension than the one dominated by romantic feelings. Imagine bringing up inflation and the Fed’s monetary tightening effect over the value of the dollar, during a candle lit dinner a deux…  Almost certainly it would kill-off the romantic mood, as your date’s eyes would start drifting vacantly in the direction of the exit door. Or imagine walking into a bar and approaching a stranger with the pickup line: “Haven’t I seen you somewhere before, your silhouette reminds me of the 10-year treasury yield curve” … unlikely to lead anywhere. Still, some correlations can be found between the celebrations of February 14 and the spheres of finance and economics.

Some, perhaps cynically, dismiss what is supposed to be the most romantic day of the year as little more than a commercial construction, aimed at driving consumption. Others even point at how every year divorce lawyers look forward to the date, as the number of those looking to file for divorce spikes around Valentine’s. Apparently, the stress of trying to come up with something special on the day becomes too much, triggering the collapse of already struggling relationships.

Also, there is The Valentines Effect. An economics concept referring to a rise in prices for a given product or service, which isn’t determined by a shortage in supply. The effect was first noticed amongst those buying Valentine’ flowers for their better halves, happily paying between 3 and 5 times more for red roses than at any other time of the year. This happens not just due to supply falling short in the face of increasing demand, as many would instinctively assume.

Price rises are not caused by greater demand and insufficient supply; in fact, the availability of red roses increases in line with the seasonal market needs. What happens is that buyers just aren’t as worried as they normally would be about how much the flowers cost, focusing instead on the need to buy a gift for their loved ones. This type of economic phenomena, where despite the absence of an imbalance in the supply chain, prices still rise due to psychological reasons, is known as The Valentine Effect.

Within the context of the financial markets something akin to a Valentines Effect, albeit more literally, as it describes trading dynamics occurring around Valentine’s day, has also been noticed. A Standard & Poors study found that since 1928 the S&P500 index closed in the green only on 40 per cent of Valentine days, with a similar dynamic also noted on the Dow Jones index. The reasons for such patterns are not entirely clear, but some observers believe it could be the result of the anxiety felt by traders about their plans for the evening. So, if you’re planning to trade this Valentine’s, try to fall in love with the right stocks!

 

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