Just When You Thought Things Couldn’t Get Any Better

Market negativity reached a crescendo sometime around the middle of October, as interwoven narratives of doom and gloom occupied investor and media attention. The end of globalization. Out-of-control inflation. The U.K. teetering on the edge of political abyss. Hawkish central banks. Energy shortages.

The chart below, which shows the San Francisco Fed’s news sentiment index (blue line) and the S&P 500, clearly demonstrates how media sentiment has been extremely negative of late. Furthermore, media sentiment has been lagging market price action, suggesting that much of the negative news coverage just reflects events that markets have already anticipated.

This is not to say that negative news coverage doesn’t impact investor outlooks — it certainly does. And as Shiller suggests in his book Narrative Economics, this is a big part of the story.

The blue line shows the San Francisco Fed’s News Sentiment indicator, which reflects the tone of economics coverage from 16 major U.S. newspapers. The lower the level, the worse the news coverage. Source: Bloomberg

On the morning of Thursday, October 13th, the bad inflation narrative reared its ugly head, as the month-over-month core Consumer Price Index (CPI) came in at 0.6%, above the expected 0.4%. On cue, financial markets nosedived in premarket trading.