Minding the Media

Headlines today seem to overwhelming lament falling this or worrisome that. In the face of such negativity, many might wonder why we still believe stocks should finish the year robustly. But it’s important to remember, though the media can give investors a good sense of broad sentiment, it’s often not a perfect reflection of reality. And in fact, we expect news to be dour this year.

In general, news headlines tend to play up the negative. Media is a for-profit business—that means the more eyeballs they get, the more advertising they sell. How do they get more eyeballs? We’ve discussed prospect theorybefore—the concept people feel the pain of loss over twice as acutely as they enjoy the prospect of gain. It’s tied to an evolutionary response to be hypersensitive to perceived danger. Potential viewers aren’t as motivated to tune in for positive news, so highlighting all that’s right with the world isn’t necessarily good for the media’s bottom line. You can see this effect when you turn on the news every night. As the old newspaper adage goes, “If it bleeds, it leads.”

Another factor this year? It’s an election year, and neither side has much incentive to promote positive economic news. It’s candidate Romney’s best interest to say the economy is doing terribly and pin the blame on Obama. But Obama doesn’t want to seem out of touch, so he also doesn’t want to say the economy is great. Just recently, he commented that the private sector was doing fine—a statement of fact—yet he was ridiculed from all sides and quickly backed away. No doubt, Obama remembers 1992, when George H.W. Bush said the economy was fine, but Clinton campaigned on “It’s the economy, stupid.” Bush was right, but Clinton won. Hence, neither side is likely to sunny-up their statements much. But remember, bull markets like to climb a wall of worry. And broadly bullish media isn’t necessarily a good thing—it can be a sign of euphoric sentiment and a lack of upward buying pressure boosting stocks higher. You should expect dour stories to continue—possibly even intensify—as stocks continue their climb this year.