Wall Street has been through crises before—1907, 1929, the 1970s, and 1987 all tested investors as much as the financial crisis of 2008. But this time, something is different: Three cable business channels and countless web sites offer 24-hour coverage of financial markets seven days a week.
The sheer quantity of information available raises the question: Could the media actually be contributing to the very crisis it is covering?
During past crises, average investors needed to wait until the evening news or the next day's newspaper to learn how their investments had done.
A Recipe for Panic
This year, the financial panic has unfolded minute by minute in front of investors' eyes. Meanwhile, online tools allow investors to make rash decisions, buying or selling stocks with the click of a mouse.
It's a media environment that seems like a recipe for panic. Thus, CNBC's Jim Cramer terrified many with his call on Oct. 6 for investors to sell stocks. "Whatever money you may need for the next five years," he said, "please take it out of the stock market right now, this week."
Downbeat headlines and bearish market analysis in major financial publications—including BusinessWeek—have offered readers plenty of pessimism in the past couple of months as well. The media frenzy has reached a point where CNNMoney.com advises its readers, for the sake of their sanity, to "Turn off CNBC."
Yet despite plenty of gloomy headlines and panicked talking heads, Richard Sparks of Schaeffer's Investment Research doesn't think the media are adding unnecessary fear to the market. "The facts themselves are scary enough," he says. It's a historic crisis, "and it hasn't needed any embellishment from the media," he says.
Still, the media can contribute to "huge swings in optimism and pessimism by investors," says Christopher Smith of the University of Southern California's Annenberg School for Communication. When conditions look good, analysts on TV are often "excessively optimistic," he says. "When things go sour, they outdo each other telling people how bad things could get."
Adding to the fear is the fact that, while more and more people own stocks through individual retirement and 401(k) accounts, many Americans remain fairly uninformed when it comes to investing and the way financial markets work. Add in a crisis that is so complex that it's hard to describe simply, and, "people are just paralyzed," says Marty Steffens, chair in business and financial journalism at the Missouri School of Journalism. "Most people I talk to have no idea what to do."
Financial media outlets are used to serving active investors who are usually fairly well informed, but the crisis has attracted attention from plenty of Americans with very basic questions, such as whether bank accounts are safe, Steffens says. Moreover, "there's also the huge danger of giving someone the wrong advice," she says. "What might be great advice for me might be bad advice for you."
Sharp Pain for Institutional Investors
Even with these stresses, however, there is anecdotal evidence that average Americans and individual investors are actually less panicked these days than the professionals on Wall Street are. Many hedge funds, for example, are being forced to sell off assets, Sparks notes.
An individual saving for retirement has the luxury of waiting out a big market sell-off. Institutional investors, by contrast, are judged by their short-term performance. "They're feeling more pain than the individual investors," Sparks says.
The media focus on the financial crisis has another important ingredient this year: Politics. Much of the media coverage of the economy inevitably leads to a discussion of the Presidential race. For the past two months, the economy has been topic No. 1 (BusinessWeek.com, 10/23/08) one for both Democratic nominee Barack Obama and Republican John McCain.
GOPers More Upbeat
A rough economy would be expected to hurt the incumbent party, and that's what has happened this fall as the crisis has helped Obama and hurt McCain, says Lynn Vavreck, a political science professor at the University of California at Los Angeles. She notes that one's political allegiance can actually influence one's perception of the economy. Polls have shown Republicans far more optimistic about the state of the economy than Democrats are, Vavreck says.
David Domke, a professor of communication at the University of Washington, thinks the Presidential election might actually be helping to limit the general public's panic level (BusinessWeek.com, 10/9/08). Fear is often driven by a sense of helplessness—the feeling that you don't know what to do, he says. "In some ways, the Presidential election gives people a sense that there is something they can do: They can vote for one of these candidates, whoever they think can do something about [the crisis]," Domke says.
The same might be true of the vast amounts of financial coverage available to people during this crisis. The availability of information makes people feel a little less helpless. It gives people a "feel of control to get as much information as they want," Domke says.
Of course, a relentless diet of bearish market news may ultimately limit even the heartiest investor's hunger for information.