Pre-market stock stories: predictive or prescriptive?

The pre-market “stocks are set to open up/down” story is a stable of daily wire service coverage. When I worked in a newsroom, I would come in to the early stock reporters chatting with traders about which way the market was heading and scanning the futures markets. They were scrambling to predict the whims of investors before they were even allowed to trade.

Here’s an example of a pre-market story from Monday from the Associated Press (via the Huffington Post):

U.S. stock futures are building on gains from Friday’s strong jobs report as Wall Street turns its attention to the traditional start of earnings season.

Dow Jones industrial average futures are up 68 points at 15,144. The broader Standard & Poor’s 500 futures are up 9.20 points at 1,636.50. Nasdaq futures are up 18 points to 2,974.

Aluminum giant Alcoa Inc.’s quarterly earnings report, expected after the markets close Monday, kicks off the summer earnings season.

The overall corporate earnings outlook has dimmed. Analysts now predict that second-quarter earnings for companies in the Standard & Poor’s 500 rose 3 percent compared with a year earlier, according to a survey by S&P Capital IQ. But as recently as April 1, they predicted a gain of nearly 7 percent.

Here’s a Reuter’s example for the European markets:

European stock index futures pointed to a higher open on Monday, with investors in the region focused on Greece as it looks set to reach a deal with its lenders over its latest aid payment.

At 0601 GMT, futures for Euro STOXX 50, for UK’s FTSE 100, for Germany’s DAX and for France’s CAC were 0.4 to 0.7 percent higher.

Most of these stories are quickly replaced with ones that have the current share price and then are continually updated as the market ticks up or down. But how much influence do these stories actually have on the market?

In the middle of the trading day, this was the top of the Bloomberg story:

U.S. stocks rose, giving the Standard & Poor’s 500 Index a third straight day of gains, as investors waited for Alcoa Inc. (AA) to kick off earnings season.

Alcoa increased 0.6 percent, as the largest U.S. aluminum producer will report results after markets close today. Dell Inc. (DELL) rallied 2.9 percent after the biggest shareholder-advisory firm said investors should accept founder Michael Dell’s buyout offer. Priceline.com (PCLN)added 3.2 percent after Morgan Stanley raised its recommendation on the stock. Intel Corp. slumped 3.8 percent amid an analyst downgrade.

The S&P 500 (SPX) added 0.4 percent to 1,638.77 at 1:35 p.m. in New York, trimming an early gain of 0.8 percent. The Dow Jones Industrial Average rose 75.48 points, or 0.5 percent, to 15,211.32. Trading in S&P 500 stocks was 6.9 percent below the 30-day average during this time of day.

“We’re still working through sideway movements and we’ll have a leg up between now and the year-end,” Tom Wirth, a senior investment officer for Chemung Canal Trust Co., in Elmira, New York, said in a telephone interview. His firm manages $1.7 billion. “Accelerating economic growth will be the driving force. I don’t think second-quarter earnings are going to be great. There are going to be a lot questions on how companies’ order books look like.”

The S&P 500 (SPX) gained 1.6 percent last week, as better-than-estimated economic data tempered concern over a possible scaling back of Federal Reserve stimulus. Employers added more jobs than forecast in June, and other data during the week showed jobless claims decreased and manufacturing improved. While the index has fallen 1.9 percent since its May 21 record, the gauge is up 15 percent for 2013.

Throughout the day, reporters are talking to traders, presumably those who are smart and tapped in. This color goes into the daily story and helps inform how people are looking at the markets. For example, traders could sell retail stocks before consumer confidence numbers that are expected to be weak.

But as more and more people pile into a trade, it pushes the market down. It’s interesting to think that a Bloomberg story predicting that the stock market will open down could in fact cause the market to do just that as people sell ahead of the drop.

Because both institutional and retail investors have access to the same basic information from the media, it’s easy to think that stock market coverage could in fact shape the direction of the market.

On the other side, institutional managers and those with large positions are presumably not trading on what’s in the Wall Street Journal or based on which direction Bloomberg says the market will go. They sell their abilities to analyze information and make independent decisions.

Reporters are also likely talking to those with the largest positions, so it’s possible the story mirrors the market because managers have already made an investment decision and acted on it before they’re quoted in the paper.

It’s an interesting thinking about which comes first, the market moving story or the traders that talk about their market moves after the fact. I’ll bet the truth lies somewhere in the middle.