What Is Headline Risk?
Headline risk is the possibility that a news story will adversely affect a stock's price. Headline risk can also impact the performance of a specific sector or the stock market as a whole. For example, news of a trade war between the United States and China created headline risk for the broader financial markets in 2018-2019.
Understanding Headline Risk
Headline risk is the risk that a news headline or story can influence the price of a stock, sector, or broader market. Suppose that a pharmaceutical company releases a new drug called “Cholestride” that dramatically reduces a person’s cholesterol levels. In response to the drug, a competitor organizes for a study that finds a possible but not conclusive link between the new cholesterol medication and liver damage. This creates a headline risk for Cholestride's makers that must be managed to prevent it from having a material impact on the company's stock price. (See also: 10 Risks that Every Stock Faces.)
Headlines generated by newspapers, television, or online - including social media posts such as on Twitter - can moves stock prices. Note that prices can move, even if the story is incorrect or misleading, although in such cases the prices will tend to snap back. Headlines can also create positive movements, such as the approval of a new drug by the FDA or some other breakthrough.
Headline risk can be mitigated through effective public relations (PR) campaigns. Successful public relations efforts can promote positive images of a company that can help counteract any negative stories as well as provide swift damage control if such a story is released. (To learn more, see: 6 Tips for Spinning a PR Nightmare.)
- Headline risk is that a news story will adversely affect a stock's price, where the timing and content of the story is unknown in advance.
- Headline risk most often affects individual companies, but can also bear down on sectors or the entire market.
- Headline risk can be mitigated through public relations (PR) campaigns and a long-term strategy from investors that disregards short-term fluctuations triggered by headlines.
Managing Headline Risk
Individual investors can counteract headline risk by using a buy-and-hold investing strategy that ignores the short-term changes in the market that are triggered by headlines. For instance, instead of focusing on day-to-day stock price fluctuations, investors should asses the performance of their portfolios at the end of each quarter and make any necessary changes accordingly.
A 24-hour news cycle means investors are continuously exposed to headlines that may negatively impact their investments. Instead of reading every financial news story, investors should focus on just a few credible news sources that provide reliable information or conduct their own research. There is a plethora of free information online for investors to learn the basics of financial and technical analysis. (For more, see: The Basics of a Financial Analysis Report.)
Example of Sector-Specific Headline Risk
In the aftermath of the 2007–2010 subprime lending crisis, mortgage lenders such as Bank of America, JPMorgan Chase & Co. and Citigroup faced significant headline risk from other financial institutions collapsing or coming under severe financial pressure.
After the collapse of Lehman Brothers and the bailout of prominent financial institutions including Fannie Mae and Freddie Mac in 2008, investors had little confidence in the stability of the financial system, and any negative headline relating to the financial sector had the potential to spark a stock selloff in financial stocks. (See also: The Collapse of Lehman Brothers: A Case Study.)