What are the celebrity sources quoted as saying in these types of articles? They typically give numerical forecasts for the DowJones Industrial Average, tell stories or jokes, and dispense their personal opinions. For example, when Abby Joseph Cohen of Goldman, Sachs & Co. coins a quotable phrase-as with her warnings against "FUDD" (fear, uncertainty, doubt, and despair) or her phrase "Silly-- Putty Economy"-it is disseminated widely. Beyond that, the media quote her opinions but pay no critical attention to her analysis. In fact, although she no doubt has access to a formidable research department and performs extensive data analysis before forming her opinions, they are ultimately reported as just that-her opinions. Of course she should not be faulted for this, for it is the nature of the sound-byte-driven media that superficial opinions are preferred to in-depth analyses.

Record Overload

The media often seem to thrive on superlatives, and we, their audience, are confused as to whether the price increases we have recently seen in the stock market are all that unusual. Data that suggest that we are setting some new record (or are at least close to doing so) are regularly stressed in the media, and if reporters look at the data in enough different ways, they will often find something that is close to setting a record on any given day. In covering the stock market, many writers like to mention "near-record oneday price changes"-measured in points on the Dow rather than percentage terms, so that records are much more likely. There may be some increased enlightenment about reporting points on the Dow in recent years, after so many records have been set, but the practice still persists among media accounts.

This record overload-the impression that new and significant records are constantly being set-only adds to the confusion people have about the economy. It makes it hard for people to recognize when something new and truly significant really is happening. Record overload, with its deluge of different indicators, also encourages an avoidance of individual assessment of quantitative data in favor of seeing the data interpreted for us by expert sources.

Markets and Crises

Many people seem to think that it is the reporting of specific news events, the serious content of news, that affects financial markets. But research offers far less support for this view than one would imagine.

Victor Niederhoffer, while an assistant professor at Berkeley in 1971 (before he became a legendary hedge fund manager), published an article that sought to establish whether days with big news stories corresponded to days that saw big stock-price movements. He tabulated all very large headlines in The New York Times (large type size being taken as a crude indicator of relative importance) from 1950 to 1966; there were 432 such headlines. Did these days correspond to big movements in stock prices? As the standard of comparison Niederhoffer noted that the S&P Composite Index over this period showed substantial one-day increases (of more than 0.78 percent) on only 10 percent of the trading days, and substantial oneday decreases (of more than 0.71 percent) on only another 10 percent of the trading days. Of the 432 "big news days," 78 (18 percent) showed big price increases, and 56 (13 percent) showed big decreases. Thus big news days were only slightly more likely to show large price movements than other days.

Niederhoffer claimed that, on reading the stories under these headlines, many of the news events reported did not seem likely to have much impact on the fundamental value represented by the stock market. Perhaps what the media thought was big national news was not what was really important to the stock market. He speculated that news events that represented national crises were more likely to influence the stock market.

Defining a national crisis as a time when five or more large headlines occurred within a seven-day period, Niederhoffer found 11 crises in the sample interval. Among these were the beginning of the Korean war in 1950, the capture of Seoul by the communists in 1951, the Democratic National Convention of 1952, Russian troops' threatening of Hungary and Poland in 1956, the entry of US marines into Lebanon in 1958, Russian premier Nikita Khrushchev's appearance at the United Nations in 1959, the Cuban arms blockade in 1962, and President John F Kennedy's assassination in 1963. During these so-called crises, 42 percent of the daily price changes were "big" changes, as compared with 20 percent for other, "normal" time periods. Thus the crisis periods were somewhat, but not dramatically, more likely to be accompanied by big stock-price changes.

Importantly, however, there were only 11 such weeks of"crisis" in the 16 years of Niederhoffer's sample. Very few of the aggregate price movements in the stock market show any meaningful association with headlines.

Tag-Along News

News stories occurring on days of big price swings that are cited as the causes of the changes often cannot plausibly account for the changes-or at least not for their full magnitude. On October 13, 1989, there was a stock market crash that was clearly identified by the media as a reaction to a news story. A leveraged buyout deal for UAL, the parent company of United Airlines, had fallen through. The crash, which resulted in a 6.91 percent drop in the Dow for the day, had begun just minutes after this announcement, and so it at first seemed highly likely that it was the cause of the crash.

The first problem with this interpretation is that UAL is just one firm, accounting for but a fraction of one percent of the stock market's total value. Why should the collapse of the UAL buyout have such an impact on the entire market? One interpretation at the time was that the deal's failure was viewed by the market as a watershed event, portending that many other similar pending buyouts would also fail. But no concrete arguments were given why this was really a watershed event; rather, calling it so seemed to have been nothing more than an effort to make sense of the market move in response to the news.