The headline effect?
Negative press coverage affects a company or economy through its headline effect. Many economists think unfavorable news stories reduce consumer spending.
Understanding Headline Effect
Extension of Headline Effect
Whether warranted or not, the investing public’s reaction to a headline can be solid and disproportionate to the positive news. When a government agency or central bank releases an unfavorable economic report, traders, investors, and the investing public may disproportionately convert, sell, or short funds from affected stocks, currencies, or other investments. Although this market reaction is reasonable and expected, the headline impact can accelerate and intensify it by bringing adverse news to the trading public’s attention.
Possible Headline Effect Causes
Many economists and market analysts have proposed reasons for the headline impact. A mix of causes is likely, but here are some possibilities. Media sensationalism may cause the headline effect. Negative news sells and attracts clicks and page views; therefore, the media promotes it more. Widely, often, or conspicuously covered news items inherently garner greater attention and emotion.
Second, risk and loss aversion may potentially contribute to the headline impact. Most individuals evaluate risks, hazards, and losses more highly when making decisions. This suggests that negative news will be more influential than positive news.
Finally, institutional factors that encourage prudence in corporations and fiduciaries may cause the headline impact. This includes accounting principles like conservatism and prudential standards for institutional funds like pensions.
Example of Headline Effect
A headline effect is the media’s heavy coverage of the effects of rising gas prices on consumers. Some economists think paying more attention to tiny fuel price rises will make people more careful about spending their discretionary cash. The headline impact distinguishes between logically acceptable discretionary spending cuts and those caused by press attention.
The impact of the Greek debt crisis on the euro is another headline consequence. Despite accounting for barely 2% of the eurozone’s economic activity, the Greek economic crisis effectively weakened the euro.1Public reaction to negative news about the Greek economy impacted not only the eurozone but also nations like the UK, which rely on commerce with the eurozone for economic assistance. Some say the headline impact might undermine the euro and the EU’s future.
Key Takeaways
The headline impact states that negative news affects prices and markets more than favorable news.
Media sensationalism, risk and loss aversion, and prudential institutional bias may explain the headline impact.
The headline effect includes gasoline price fluctuations affecting consumer discretionary expenditure and the Greek financial crisis affecting the currency.
