Link Found Between Newspaper Headlines & Stock Market Fluctuations

The amount of power held by the Fourth Estate is a topic often debated. Many say it holds considerable sway in influencing the culture and popular opinion. But can media coverage of economic news actually play a significant role in determining whether your stock market investments rise or fall?

Gene Birz, who began teaching this semester at Southern as an assistant professor of economics and finance, says yes it can, at least in the short run.

Birz has conducted a study that examined newspaper headlines during a period of more than 13 years that pertained to several key monthly economic reports. Each headline was categorized as either positive, negative, neutral or mixed. He then examined whether the stock market had risen or fallen on the day of the release of these economic reports.

What he found was that the headlines involving two major economic reports – the unemployment rate and the GDP (Gross Domestic Product) – had a direct correlation on whether the market went up or down on the trading day when the reports were released. If the headlines were rated positive – as determined by research assistants for the American Enterprise Institute – stocks tended to rise the next trading day, on average. Conversely, if the headlines were considered negative, the market generally declined.

"The headlines reflected the perceptions of journalists, which are very similar to those of the general public," Birz says. He says that most such headlines are not usually written by economic experts, and therefore are more reflective of how the average person would perceive the economic news.

Birz says that business experts generally have felt that the stock market is influenced by economic news, but that the theory had not been supported by strong empirical evidence. He says one of the reasons for that lack of evidence is that it is not just the economic statistics in and of themselves that influence the market, but also how that information is interpreted by investors. He also says the news headlines are important in that they often give people, particularly investors, a quick interpretation of what otherwise can be a complex or ambiguous story.

He adds that the study also looked at the link between the stock market and headlines about durable goods and retail sales, but they were not statistically significant.

Birz's findings were published last November in the Journal of Banking & Finance. The article, which he co-wrote with John R. Lott Jr., was called "The Effect of Macroeconomic News on Stock Returns: New Evidence from Newspaper Coverage."

He previously served as an adjunct faculty member at Adelphi University in Garden City, N.Y. In 2009-10, Birz was a lecturer at Binghamton University in Vestal, N.Y., where he earned a Master of Science degree in economics in 2007 and a Doctor of Philosophy degree in economics in 2011.

Birz also has worked as an associate at Morgan Stanley in New York as part of the internal audit risk management group.