The Valentine’s Day Effect & How To Trade Markets On The Lover’s Holiday

Valentine’s day is a day of love, romance, and of course, the market process. On this special day lovers across the U.S.—and Canada, Mexico, Australia, New Zealand and much of Europe—buy roses for their sweethearts.  A beautiful gift, roses are.  Pricey too, especially on Valentine’s Day. The traditional gifts include chocolate and of course a girl’s best friend, jewelry. People are planning to lavish attention on their loved ones this Valentine’s Day, spending much more than last year. In 2016, Valentine’s Day is estimated to contribute $19.7 billion to the economy, according to the National Retail Federation. That’s even better than last year’s record of $18.9 billion. In 2014, only $17.3 billion was spent, lower than the $18.6 billion spent in 2013.

If you have ever bought fresh-cut roses, you may have noticed that their price varies considerably during the year. In particular, the price you pay for fresh-cut roses— especially red roses—around Valentine’s Day is usually three to five times higher than at other times during the year.

Is Valentine’s Day a result of a conspiracy among florists and rose growers to gouge romantic consumers? Probably not.

This pricing behavior can best be understood as an application of comparative statics analysis. Every year, the market changes around Valentine’s Day. During the days before Valentine’s Day, demand for red roses increases dramatically, resulting in a rightward shift in the demand curve for roses from D1 to D2. This rightward shift occurs because around Valentine’s Day, people who do not care about the cost it is more about satisfying the need.

Even though the price is higher, the equilibrium quantity is also higher than it was before. This outcome does not contradict the law of demand. It reflects the fact that the Valentine’s Day equilibrium occurs along a demand curve that is different from the demand curve before or after Valentine’s Day.

This is a true example of supply and demand and market equilibrium at work. It is named “The Valentine Effect”

Everyone likes and expects chocolate to celebrate their Valentine’s Day, and the speculators in the markets have been seen to benefit as a result.   If you’re looking at Hershey, the market tends to favor the period after the “love-filled” day, and Cadbury reveals the opposite, being favored the time leading up to the event.

Jewelry Stores and Flower suppliers have shown more declines during this period than gains.   Chocolate and candy appears to be the wallet friendly alternative to these lavish items, and you’ll end up gaining much more than you’ll lose.

S&P research finds that since 1928 the S&P 500 has closed up on just 40 per cent of Valentine’s Days. Similarly, the Dow Jones Industrial Average has risen on 14 February just 43 per cent of the time.

Perhaps investors are more concerned by their plans for the evening. There’s some academic evidence to support the idea.

In their 2009 paper, “Widespread Worry and the Stock Market”, researchers Gilbert and Karaholis used social data from LiveJournal to gauge how mood affects stock market returns. A one standard deviation rise in their “Anxiety Index” was found to correspond with S&P 500 returns 0.4 per cent lower than otherwise expected – and in 2008 the Anxiety Index has a blip coinciding with Valentine’s Day.

And if you want to trade futures near Valentine’s Day, perhaps better to do it just before.

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