Dollars & Sentiments
Press Coverage May Foreshadow Stock Market Shifts
By Vivé Griffith
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Easy Trading Tips?
If negative words in a newspaper column can predict a downfall in the market, Tetlock’s findings beg the question: Are investors sitting down to read “Abreast of the Market” with their morning coffee and trading accordingly over the course of the day?
Tetlock admits it’s hard to say. It’s possible that people are reading the “Abreast of the Market” column and responding to its information and mood, a response that is visible in the market by the close of day. But it’s also possible that the column is capturing investor sentiment right before it is reflected in stock prices. Simply put, its reporting is slightly ahead of the curve.
“Unfortunately, I’m not able to know whether it’s the
column causing the movement or whether the column is just
accurately reflecting investors’ moods,” Tetlock
says. “My suspicion is that the column is merely
capturing the general mood of the market and how
traders are feeling, but I can’t prove that one way
or another.
What he can prove is that investor sentiment is a powerful force. Economic data alone are not driving the price of stocks—the moods of those making the calls on the trading room floor clearly have an impact. And those moods, ultimately, may be measurable.
Tetlock’s findings then beg a second question: Has he uncovered a slick new way for investors to game the market?
Tetlock laughs at the suggestion. Each time he gives a seminar about his findings he receives calls from people asking him that same question. He urges caution.
“My research does show that there is some amount of predictability in stock market returns based on negative words,” he says. “So knowing which words are negative and knowing how many negative words are out there is helpful in guiding you when you are buying and selling. But I wouldn’t use it as the sole basis for a trading strategy.”
Economics & Psychology: A Tangled Web
Tetlock has found it’s not just the “Abreast of the Market” column that can be predictive of changes in the market. He’s studied the impact of firm-specific articles in the financial press, looking at how reporting in the Wall Street Journal and the Dow Jones News Service influences firms’ stock prices. And he’s now investigating whether the words the Federal Reserve uses in speeches and testimony have an appreciable impact on the market.
“I just read a headline that said, ‘Market goes up on Fisher’s comments,’” Tetlock says. “Richard Fisher is the president of the Dallas Fed, so that’s exactly what I’m trying to study. Why did the stock market go up after Fisher’s remarks? Did they convey economic information? Or did they convey information about what the Fed is going to do? Perhaps studying the language used by the Fed will help disentangle its journalistic reporting role from its interest rate policymaking role.”
Tetlock points out that his work underscores the kind
of influence the financial press can have on the
country’s economy. The Wall Street Journal, for
example, has a circulation of more than two million
readers.
“It would be difficult for economic information to become quickly reflected in stock prices unless someone communicates that information to traders,” Tetlock says. “Journalists clearly play that role. But the media also provides an invaluable source of data on the sociology and psychology of the marketplace. Studying the language used in the financial news can improve our understanding of whether economics or psychology is moving markets.”
If negative words in a newspaper column can predict a downfall in the market, Tetlock’s findings beg the question: Are investors sitting down to read “Abreast of the Market” with their morning coffee and trading accordingly over the course of the day?
Tetlock admits it’s hard to say. It’s possible that people are reading the “Abreast of the Market” column and responding to its information and mood, a response that is visible in the market by the close of day. But it’s also possible that the column is capturing investor sentiment right before it is reflected in stock prices. Simply put, its reporting is slightly ahead of the curve.
“Unfortunately, I’m not able to know whether it’s the
column causing the movement or whether the column is just
accurately reflecting investors’ moods,” Tetlock
says. “My suspicion is that the column is merely
capturing the general mood of the market and how
traders are feeling, but I can’t prove that one way
or another.What he can prove is that investor sentiment is a powerful force. Economic data alone are not driving the price of stocks—the moods of those making the calls on the trading room floor clearly have an impact. And those moods, ultimately, may be measurable.
Tetlock’s findings then beg a second question: Has he uncovered a slick new way for investors to game the market?
Tetlock laughs at the suggestion. Each time he gives a seminar about his findings he receives calls from people asking him that same question. He urges caution.
“My research does show that there is some amount of predictability in stock market returns based on negative words,” he says. “So knowing which words are negative and knowing how many negative words are out there is helpful in guiding you when you are buying and selling. But I wouldn’t use it as the sole basis for a trading strategy.”
Economics & Psychology: A Tangled Web
Tetlock has found it’s not just the “Abreast of the Market” column that can be predictive of changes in the market. He’s studied the impact of firm-specific articles in the financial press, looking at how reporting in the Wall Street Journal and the Dow Jones News Service influences firms’ stock prices. And he’s now investigating whether the words the Federal Reserve uses in speeches and testimony have an appreciable impact on the market.
“I just read a headline that said, ‘Market goes up on Fisher’s comments,’” Tetlock says. “Richard Fisher is the president of the Dallas Fed, so that’s exactly what I’m trying to study. Why did the stock market go up after Fisher’s remarks? Did they convey economic information? Or did they convey information about what the Fed is going to do? Perhaps studying the language used by the Fed will help disentangle its journalistic reporting role from its interest rate policymaking role.”
Tetlock points out that his work underscores the kind
of influence the financial press can have on the
country’s economy. The Wall Street Journal, for
example, has a circulation of more than two million
readers.“It would be difficult for economic information to become quickly reflected in stock prices unless someone communicates that information to traders,” Tetlock says. “Journalists clearly play that role. But the media also provides an invaluable source of data on the sociology and psychology of the marketplace. Studying the language used in the financial news can improve our understanding of whether economics or psychology is moving markets.”
