The Handbook of News Analytics in Finance

4.3 NEWS MOVES MARKETS

The notion of a stock market in the US is closely associated to the major stock indexes such as the Dow Jones Industrials Index, the NASDAQ 100 Index, and the S&P 500 Index. If all these three indexes move drastically downward in a short period of time, they create a perception that the stock market has crashed. If these three indexes move upward significantly in a short timeframe, there is a perception that a new stock market bubble is being created. The extreme moves of any of the three major indexes create a plethora of news stories that communicate the sentiment of a stock market “crash” or a stock market “bubble” to millions of investors.

The two most recent “bubbles” are considered to be the dot com technology bubble and the housing market bubble. In both cases these bubbles were followed by a significant “crash” of the stock market where trillions of dollars of wealth disappeared over night. While the dot com and housing sectors were affected the most, virtually every sector of the economy was impacted negatively to the point that both crashes were followed by economic recessions.

The interesting aspect of “bubbles” and “crashes” news reporting is that investors' perceptions have been that one must follow the other. Therefore, if there is a bubble the news reports will start asking the question “when will the bubble burst?” and if there is a “crash” the news reports will start asking questions like “have we hit the bottom yet?”

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