By Kathleen Madigan
Absolute Strategy Research and the Wall Street Journal announced
Tuesday the release of a new set of monthly economic indexes
designed to track major national economies and the global
economy.
The Absolute Strategy/WSJ NewsFlow Indexes compare the positive
and negative news coverage of economic events using articles from
the Dow Jones' news-story database, Factiva.
Each month, analysts at ASR will search Factiva, the Dow Jones
news database, for six key word variables connected to economic
activity. ASR will count the number of articles where these key
words are found in a positive context and contrast that to the
number of stories where the words are found in a negative
context.
Using the difference between the number of positive and negative
stories, ASR will create an index connected to six different
economic topics. For each index, a reading above zero implies more
positive than negative news.
The September indexes will be released Tuesday, within the hour,
at 9:45 a.m. EDT.
David Bowers, head of research at London-based ASR, explains the
details of the new indexes.
Q. What economic topics are covered?
A. The indexes track coverage of economic growth, analyst
estimate revisions to corporate earnings, revenue/sales,
employment, inflation and the perception of monetary policy. We
publish global results as well as six country/regional
breakdowns.
We have also created a composite newsflow index (CNI) which
provides a summary measure of the six components. For the
composite, a reading above 50 implies positive coverage.
Q. How have these indexes, looking back, tracked other
long-established sentiment indexes as well as other rough measures
of economic confidence?
A. Going back 20 years, we are astonished at how close the
relationships are with some of the official economic data or with
Markit purchasing managers index components.
Q. What about financial market data, such as the S&P
500?
A. So far we have not yet created new measures of stock-market
sentiment, but we believe the potential is there. The process we
have developed has the potential to create similar indicators for
stock market indexes, such as the S&P 500, at both the country
and sector level.
Interestingly, the CNIs provide insight for asset allocators
with a remarkable correlation to the year-on-year change in stock
versus bond returns. The CNI shows that stocks beat bonds when you
have positive surprises (and vice versa). This is pretty intuitive,
but it is exciting to see that work in practice!
Q. How can a reader make the best use of the indexes?
A. The indexes should help a reader evaluate the economic
surprises of one country vs. another. For example, if the U.S. CNI
is 65 and the euro zone CNI is 35, the U.S. economy is having a
better experience. Its economy is 'surprising positively' whereas
the euro zone (with a CNI below 50) is 'surprising negatively'
(i.e. more negative stories than positive stories).
Q. Can a reader compare the U.S. results with that of other
countries?
A. Cross-country comparisons are possible with one important
qualification: all our searches are currently done in the English
language. At first, we thought this would be a major problem, but
the results for countries such as Japan and China have been quite
good despite relying solely on English language sources in those
countries.
However, there will probably be a bias in the global newsflow
aggregates towards the Anglo-Saxon economies, where there may be a
disproportionately high number of stories.
Q. What can investors and economy-watchers glean from the
monthly indexes?
A. We believe that the newsflow indexes are a good way of
monitoring economic surprises, particularly surprises that are
considered sufficiently newsworthy to merit an article or report.
It is not possible to read all the daily newspapers from around the
world. Because Factiva draws on an extensive range of different
news sources, it allows us to get a broader sense of what is
happening globally.
Q. Do the indexes "forecast" the economic indicators?
A. No, the series do not lead the traditional data releases, but
they provide a very timely tracking of the global economy.
Q. When will the indexes be released?
A. The previous month's results will be released at 9:45 a.m.
(Eastern) on the Tuesday following the release of the US non-farm
payrolls.
Q. Are the indexes seasonally adjusted?
A. We do a simple seasonal adjustment of the results. We also
adjust for the fact that there are more news sources on the Factiva
database today than there were 20 years ago.
Q. What inspired the indexes?
A. What inspired us back in 2007 was what we saw as an untapped
source of macroeconomic data, namely a news database [Factiva]
curated by journalists, together with software that allowed us to
interrogate that database going back twenty years. We saw the
potential to create quantitative measures where no reliable data
existed (e.g. for some emerging markets), as well as the scope to
track developments in the industrial sectors and interest in
investment themes (e.g. climate change).
Investment strategists have used simple macro word counts
before. What makes ASR's searches unusual is the way we have tried
to add context, to sort the positive stories from the negative.
After all, there is a big difference between going into recession -
and coming out of recession. Keyword search simply won't pick that
up that distinction. This is what makes the Factiva software so
well suited to this task.
-Write to Kathleen Madigan at kathleen.madigan@wsj.com
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