Financial news articles can be a good short-term indicator of why the U.S. stock market is doing well or poorly, according to a National Bureau of Economic Research study, reports Clark Merrefield of The Journalist’s Resource.
Merrefield writes, “The authors organized the Journal articles by topic, then predicted what aggregate S&P 500 returns would look like based on those topics the Journal was covering. Coverage of economic events that might affect market returns, like recessions, fluctuate over time. When the economy is doing well, fewer stories use the word ‘recession.’ An uptick in recession-related stories would, for example, lead their model to predict lower overall S&P 500 returns.
“Each day, the 505 publicly traded firms that make up the S&P index gain or lose value, or stay roughly the same. For their 23-year sample of news articles, the authors compared their predictions of monthly S&P 500 returns with actual S&P monthly returns. Across all months in their sample, predictions based on the Journal articles amount to one-quarter of the actual returns, on average.
“That makes Journal coverage a stronger indicator and potential short-term predictor of market performance than even certain federal macroeconomic data, according to the authors.”
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