The other day I was bored and I started to review some publications in social networks, calling my attention to the following news itemwhere we can see how historically the last quarter of the year in the American market tends to have the best returns. The data backs it up: for decades the fourth quarter has been the one with the best stock market returns. One tends to think of these situations by thinking of investors buying before the holidays, and also adjusting portfolios to have "the best possible picture" in all annual reports.

With that information on a plate, it sounds very tempting to invest at this time of year... it is as if the calendar is winking at you and saying "Invest now". The idea of this note is to invite you to pause and think twice.

Although historical numbers paint a pretty picture, in the short term investments, especially stock funds, can contain noise, volatility and associated forward risks that one is unable to see if one is staring in the rearview mirror. Obsession with short-term patterns is like trying to predict the future with a broken crystal ball. The important thing, as we have discussed in previous newsletters, is to keep the focus on the long term.is to keep the focus on the long term where the real trends emerge and the noise is diluted. Let's dive into today's topic, a very interesting study that will illustrate these concepts.

What does dancing have to do with investments? Imagine the following situation: you're at a party, your favorite playlist is playing, and suddenly you think: "What if the beat of these songs predicts how the stock market is going to do tomorrow?". It sounds absurd, but for some people it might not be. In 2012, Philip Maymin, a professor and finance expert, published a study titled "Music and the Market: Song and Stock Volatility" in the North American Journal of Economics and Finance.

Basically, he analyzed almost 50 years of data, from 1958 to 2007, comparing the most popular music on the Billboard Top 100 with the performance of the S&P 500, the U.S. stock market's flagship index. What exactly did he measure? The "volatility" of the music, that is, how much the beats per minute (BPM) varied in the top songs of the year. BPMs are like the pulse of a song: a 60s rock and roll might have stable and predictable BPMs, while a 90s hip-hop song varies a lot. 

Maymin found a rather striking negative correlation: when popular music was more "uniform" (low variance in BPM), the stock market tended to be more volatile (higher ups and downs in returns). And vice versa: in times of chaotic music, the market calmed down a bit. Some examples to visualize this: In the 70s, with the oil crisis and runaway inflation, pop music (think disco and funk) had varied and complex rhythms, and the stock market (from top to bottom), maintained similar levels. By contrast, in the 1980s, with the Reagan boom and more predictable music such as synthesized pop, the market returned to expected growth. Maymin even suggests that music reflects the "collective sentiment" of society: if people are stressed about the economy, they prefer soothing, uniform songs, which coincides with nervous markets.

So, do we play music and go shopping?

The study is fascinating, but it illustrates the absurdity of making correlations with no real predictive power in the short term. Maymin himself admits that this is more of a statistical curiosity than a tool for traders. It's like those "sell in May and go away" myths or "the Super Bowl effect" (where if an NFL team wins, the stock market goes up... Seriously, there are studies on that). People see patterns everywhere because our brains love stories, but in reality, these correlations are spurious: they don't cause anything, they just happen to coincide. Trying to use them for short-term decisions is like betting on roulette based on the color of the croupier's shirt, a game where you will end up paying without understanding why there are no returns.

There are thousands of examples like these, such as correlations between the length of women's skirts and stock market performance (look up the "Hemline Index" if you don't believe me), or the number of pirates and global warming. All very interesting and fun, but useless for predicting the next moves. The point is that, in the short term, the market is influenced by unpredictable news, human emotions and algorithms that react in milliseconds. Obsessing over these "patterns" distracts you from what is really important: consistency, long-term investing and diversification. 

At the end of the day, coming into the last quarter is always interesting to see whether or not we confirm the theory again. Yes, there are trends, but in the short term, you can easily pass noise off as something else. The important thing is to keep the focus on the long term: build a solid portfolio, ignore the daily fluctuations and let time work its magic. As Nassim Nicholas Taleb, academic, statistician and options trader, says: "People think that intelligence is about noticing what things are relevant; however, in this complex world, real intelligence is about ignoring what is irrelevant." 

Next time you listen to music, just enjoy it. Nothing beats having a "rally" in your playlist, and a long-term investment that is consistent.

DISCLAIMER

Gabriel Haensgen
Co-Portfolio Manager Fondos Financieros Fynsa AGF