There was a time when news traveled through pigeons! Yes, that speed and only the very important pieces traveled. However, now, with the advent of technology, computers and social media, the news media travels at lightening speed. This has its effects on the stock market as well.
The changes in the media, news and journalism industry have brought about huge changes to the financial industry. The news like earnings reports, acquisitions, IPOs or market sentiments in general are captured in fraction of seconds and relayed across the world. News has found the capability to travel fast and the traders have found the capability to react fast!
Assuming that markets perform better with more information, the stock markets should perform very efficiently with the loads of news. This, however, is not the case. The markets, with overload of information, are still biased. The investors do not react much to the positive news and react wildly to the negative ones.
Another reason is that more news does not mean better news. The flood of news is more of noise and has a lot of irrelevant material. The media creates a lot of news to receive public attentions and sometimes the relevant news get hidden because of being less meaty, and the irrelevant ones get highlighted. This causes inefficiencies in the market to a large extent.
The effect of news media on stock markets is elaborately described by Robert J Shiller in his book “Irrational Exuberance”. Robert writes,
“Although the news media—newspapers, magazines, and broadcast media, along with their new outlets on the Internet—present themselves as detached observers of market events, they are themselves an integral part of these events. Significant market events generally occur only if there is similar thinking among large groups of people, and the news media are essential vehicles for the spread of ideas.
The news media are in constant competition to capture the public attention they need to survive. Survival for them requires finding and defining interesting news, focusing attention on news that has word-of-mouth potential (so as to broaden their audience), and, whenever possible, defining an ongoing story that encourages their audience to remain steady customers.
In this process, the value of the news seems to get lost and it is only the ‘interesting’ and ‘breaking’ part that gets attention. This mutates the truth and the picture shown may not be the correct one. This affects the market in a negative way.
The news media are naturally attracted to financial markets, because, at the very least, the markets provide constant news in the form of daily price changes. Nothing beats the stock market for sheer frequency of potentially interesting news items.
The stock market has star quality. The public considers it the Big Casino, the market for major players, and believes that on any given day it serves as a barometer of the status of the nation—impressions that the media can foster and benefit from. Financial news may have great human interest potential to the extent that it deals with the making or breaking of fortunes. And the financial media can present their perennial lead, the market’s performance, as an ongoing story—one that brings in the most loyal repeat customers. The only other regular generator of news on a comparable scale is sporting events. It is no accident that financial news and sports news together account for roughly half of the editorial content of many newspapers today.
But the question is how the news gets portrayed and presented. The news media invites debates on certain issues to get attention, thus, creating more confusions in the minds of the already confused investors.
There is no shortage of media accounts that try to answer our questions about the market today, but there is a shortage in these accounts of relevant facts or considered interpretations of them. Many news stories in fact seem to have been written under a deadline to produce something—anything—to go along with the numbers from the market. The typical such story, after noting the remarkable bull market, focuses on very short-run statistics. It generally states which groups of stocks have risen more than others in recent months. Although these stocks are described as leaders, there is no good reason to think that their performance has caused the bull market. The news story may talk about the “usual” factors behind economic growth, such as the Internet boom, in glowing terms and with at least a hint of patriotic congratulation to our powerful economic engine. The article then finishes with quotes from a few well-chosen “celebrity” sources, offering their outlook for the future. Sometimes the article is so completely devoid of genuine thought about the reasons for the bull market and the context for considering its outlook that it is hard to believe that the writer was other than cynical in his or her approach.”
So, the news and media provide a lot of information on the financial markets, businesses, companies and stocks. There is no shortage of that; however, there is a shortage of relevant facts in these news pieces. Most of the news pieces are written just for the sake of writing something-anything. For instance, when a news article says ‘record earnings’, the investors are bound to think that there must be something superlative about the earnings, whereas the truth may be that there is nothing exceptional with the earnings. The market sentiments will fluctuate heavily, without a strong reason for doing so.
Thus, news and media have superficial but strong effects on the stock market prices. At most times, these effects are short-lived and are not based on many facts.