Dollars & Sentiments
Press Coverage May Foreshadow Stock Market Shifts
"If something bad is going to happen, it usually happens
in September.” The pronouncement may sound like it comes
from a Charles Dickens novel, but its source is far more
modern. It’s from the financial column “Abreast of the
Market” in the Wall Street Journal, a daily article covering
the fluctuations of the stock market.
Full of catchy phrases and lively quotes, the column’s language may be memorable. But according to Paul Tetlock, it may also be predictive.
Tetlock, assistant professor of finance at the McCombs School, has found that certain media sources, including “Abreast of the Market,” are harbingers of what’s to come in the Dow Jones Industrial Average and Standard & Poor’s 500, even when they don’t talk about hard numbers. In other words, as goes the column, so goes the market.
“In a perfectly rational world, stock prices would only incorporate economic information about firms’ values,” Tetlock says. “But it’s also possible that they respond to psychological information about how traders are feeling.”
To understand those feelings, you don’t need to be on the trading floor probing the psyches of the traders doing the buying and selling. You need only read the financial press. “Abreast of the Market,” a long-time feature in the Wall Street Journal, is a particularly rich source of psychological information. Appearing daily in the paper’s Money & Investment section—often front and center on the first page—the column provides an overview of the highs and lows of yesterday’s trading.
“It’s kind of a post-mortem of the prior day’s activity,” Tetlock explains. “The column talks a lot about traders’ feelings and expectations for the future: the psychological aspects of the market. Although it does reference firms’ business operations and profitability, that’s not really the main focus of the column. It’s psychologically rich, not economically rich, in content.”
This was important to Tetlock, whose focus on the market is less about rows and rows of numbers and more about the investor sentiment that drives those numbers. It may be because his parents are psychologists, he says, but he’s particularly interested in the people behind the supply and demand curves economists study. If conventional wisdom says a dark mood among investors leads to a drop in stock prices, can that be measured?
Investors’ Moods Measurable
“Abreast of the Market” gave Tetlock a perfect vehicle for finding out. A typical column includes quotes from management company presidents and investment strategists. It may report that a stock “failed to impress” or that “plenty of dangers still lurk” or it may ponder the moods of money managers as they come home from their summer holidays.
Tetlock analyzed every “Abreast of the Market” column from 1984 to 1999, using a computer to read more than 3,700 editions of the column. He relied on a content analysis program based on the Harvard psychosocial dictionary in which psychologists categorized most of the commonly used words in the English language into one of 77 categories. The two catch-all categories are positive and negative words, and the program allowed him to count the positive and negative words in each column.
After a particularly rough day in the market, the column is heavy with negative vocabulary. This may reflect the day that has passed, but Tetlock found it also predicts the days to come. Using a statistical procedure that controls for the influence of other economic variables, Tetlock found direct correlations between language in the column and the movement of the market.
“When there were a lot of negative words in the column, the stock market tended to fall on the day of the column and the next day as well,” Tetlock says. “The decline in the market, however, was subsequently reversed over the next four trading days, so within a week’s time the stock market returned to where it had been.”
With all other things held equal, Tetlock found that a typical increase in the column’s negativity foreshadowed a fall of 0.081 of one percentage point, or 8.1 basis points, in the Dow the next trading day. While that may sound like a subtle change, it’s actually quite significant. The average daily return of the index during the same period was only 5.4 basis points. The 8.1 basis point difference amounts to billions of dollars in firm valuations.
Full of catchy phrases and lively quotes, the column’s language may be memorable. But according to Paul Tetlock, it may also be predictive.
Tetlock, assistant professor of finance at the McCombs School, has found that certain media sources, including “Abreast of the Market,” are harbingers of what’s to come in the Dow Jones Industrial Average and Standard & Poor’s 500, even when they don’t talk about hard numbers. In other words, as goes the column, so goes the market.
“In a perfectly rational world, stock prices would only incorporate economic information about firms’ values,” Tetlock says. “But it’s also possible that they respond to psychological information about how traders are feeling.”
To understand those feelings, you don’t need to be on the trading floor probing the psyches of the traders doing the buying and selling. You need only read the financial press. “Abreast of the Market,” a long-time feature in the Wall Street Journal, is a particularly rich source of psychological information. Appearing daily in the paper’s Money & Investment section—often front and center on the first page—the column provides an overview of the highs and lows of yesterday’s trading.
“It’s kind of a post-mortem of the prior day’s activity,” Tetlock explains. “The column talks a lot about traders’ feelings and expectations for the future: the psychological aspects of the market. Although it does reference firms’ business operations and profitability, that’s not really the main focus of the column. It’s psychologically rich, not economically rich, in content.”
This was important to Tetlock, whose focus on the market is less about rows and rows of numbers and more about the investor sentiment that drives those numbers. It may be because his parents are psychologists, he says, but he’s particularly interested in the people behind the supply and demand curves economists study. If conventional wisdom says a dark mood among investors leads to a drop in stock prices, can that be measured?
Investors’ Moods Measurable“Abreast of the Market” gave Tetlock a perfect vehicle for finding out. A typical column includes quotes from management company presidents and investment strategists. It may report that a stock “failed to impress” or that “plenty of dangers still lurk” or it may ponder the moods of money managers as they come home from their summer holidays.
Tetlock analyzed every “Abreast of the Market” column from 1984 to 1999, using a computer to read more than 3,700 editions of the column. He relied on a content analysis program based on the Harvard psychosocial dictionary in which psychologists categorized most of the commonly used words in the English language into one of 77 categories. The two catch-all categories are positive and negative words, and the program allowed him to count the positive and negative words in each column.
After a particularly rough day in the market, the column is heavy with negative vocabulary. This may reflect the day that has passed, but Tetlock found it also predicts the days to come. Using a statistical procedure that controls for the influence of other economic variables, Tetlock found direct correlations between language in the column and the movement of the market.
“When there were a lot of negative words in the column, the stock market tended to fall on the day of the column and the next day as well,” Tetlock says. “The decline in the market, however, was subsequently reversed over the next four trading days, so within a week’s time the stock market returned to where it had been.”
With all other things held equal, Tetlock found that a typical increase in the column’s negativity foreshadowed a fall of 0.081 of one percentage point, or 8.1 basis points, in the Dow the next trading day. While that may sound like a subtle change, it’s actually quite significant. The average daily return of the index during the same period was only 5.4 basis points. The 8.1 basis point difference amounts to billions of dollars in firm valuations.
