What it is:
The CNN effect refers to a major negative impact on consumer spending as a result of breaking news.
How it works (Example):
CNN (which was later joined by MSNBC, BBC World News and Fox News) offers minute-by-minute updates on breaking events at home and abroad.
The theory behind the CNN effect is that consumers will not leave their homes if a major event is unfolding. Their attention will be diverted to their televisions where they will be watching minute-by-minute updates on a particularly news-worthy situation. This often times leads to a dip in consumer spending.
Consider the loss of the space shuttle Columbia in 2003. The dramatic events being covered on television kept people in their homes or offices and out of malls, shopping centers, auto dealers, etc.
Why it Matters:
Repeated instances of the CNN effect have led investors to expect a dip in the market pursuant to exceptionally news-worthy events. The CNN effect is also a common scapegoat for negative consumer spending reports.
Savvy investors learn to weather the storm or act appropriately with the expectation that "normalcy" will eventually return, rather than take a reactionary stance they may later regret.