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Chart In Focus

NY Investors Should Learn To Like The Rain

Chart In Focus
May 20, 2011

New Yorkers have recently been getting a lot of rain.  Someone recently complained to me that it had rained in New York City for 5 straight days!  As someone who lives near Tacoma, WA, in what we playfully call the "Pacific Northwet" (sic), 5 days does not sound like a very long time. 

Investors who live in New York City should learn to love the rain.  This week's chart takes a fun look at a possibly spurious correlation between New York City rainfall and the stock market.  It turns out that periods of greater than normal rainfall tend to be good periods for stock prices. 

The big run up in stock prices during the mid-1990s came during a wetter than normal period.  As New York City shifted to a drought in 1999, things got harder for the stock market, and that difficulty continued until 2003 when the rains came back again.  And the peak in 2007 coincided with a peak in great than normal New York City rainfall. 

What is interesting about the recent stock market behavior is that rainfall has been tapering off and shifting to below normal levels, this month's rainy streak notwithstanding.  That should be associated with a flat to downward period for the stock market.  But let's remember that the liquidity which the atmosphere may be withholding is getting made up for by all of the liquidity that Helicopter Ben Bernanke is dropping on the stock market.  With QE2 scheduled to end in June, it would be a bad time for a dry summer in Gotham.

This relationship between the DJIA and New York City rainfall has not always worked this well, but there are other times in history when the correlation has been pretty amazing.  This next chart shows the period from 1910 to 1936, when there was a very nice correlation between rainfall and the stock market.  

NYC rain deviation from normal 1910-36

The big bubble years of 1927-29 were an especially rainy time for New York City, and then the city switched to drought years from late 1929 through 1932, when stock prices were falling.  Both rainfall and stock prices began to rebound in 1933. 

Every time that I write about observed correlations between different types of data, someone invariably emails to remind me that "correlation does not mean causation".  That's true, but correlation does imply a common causal factor, whether or not we are able to figure out what that might be.  I don't know what factor might explain this positive correlation, but it is a fun one to observe.

It is not shown here, but it is similarly fun to note that gold prices tend to correlate well with rainfall in Seattle, where we have been seeing a lot of rain lately. 

So, to my friends in New York City, I say that for the sake of investors everywhere, please wash your cars, lose your umbrellas, or even do a rain dance, whatever it takes to keep the rainfall coming. 

Tom McClellan
Editor, The McClellan Market Report

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