Stock Prices, News, and Business Conditions

TLDR

Prior studies show that macroeconomic news has minimal impact on stock prices. The study analyzes how real‑activity news influences expected cash‑flow proxies and equity discount rates. When business‑cycle effects are considered, the study finds a stronger stock‑price/news link, and during strong economies the market reacts negatively to higher real‑activity news because discount rates rise more than expected cash flows.

Abstract

Previous research finds that fundamental macroeconomic news has little effect on stock prices. We show that after allowing for different stages of the business cycle, a stronger relationship between stock prices and news is evident. In addition to stock prices, we examine the effect of real activity news on proxies for expected cash flows and equity discount rates. We find that when the economy is strong the stock market responds negatively to news about higher real economic activity. This negative relation is caused by the larger increase in discount rates relative to expected cash flows.