News Sentiment and Stock Market Returns

Does the sentiment expressed by major newspapers about the economy usefully predict stock market returns? To investigate, we employ the Daily News Sentiment Index, constructed from “economics-related news articles from 24 major U.S. newspapers [across] all major regions of the country…with at least 200 words… The Daily News Sentiment Index is constructed as a trailing weighted-average of time series, with weights that decline geometrically with the length of time since article publication.” Update frequency is weekly, suggesting use of a 7-day simple moving average (SMA7). We calculate the SMA7 on Sundays and relate this series to weekly S&P 500 Index returns calculated from closes on the following Mondays. Using the specified weekly data series during January 1980 (limited by the sentiment series) through July 2022, we find that: (more…)