Trump Tweets And Stock Sentiment

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Includes: BA, GM, XLF
by: Jamie Wise, CFA

Summary

How should investors react when President Trump tweets about a stock?

Even the President of the United States suffers from "Diminishing Returns of Influence".

Trump's tweets are a catalyst for a broader discussion which can be mined for insight.

Source: BUZZ Indexes

Source: BUZZ Indexes

President Trump's inauguration hasn't slowed down his Twitter activity. In a recent interview with the Wall Street Journal I was asked how Trump's tweets about specific companies affect stock prices.

It's important to realize that the trading opportunity in a tweeting president is around the conversation that follows the tweet, and not the tweet itself. The "shock factor" and subsequent impact of a tweet on securities prices will break down over time. This happens more quickly than one might expect, as investors (and human beings generally) pivot their reactions quickly in changing environments.

This "diminishing return of influence" even applies to the President. We started to think about this phenomenon based on what we were seeing in the online discussion over the past few years about Apple (NASDAQ:AAPL) and Carl Icahn's tweets.

At first, it's surprising that a person of influence would so freely share their views about a company's prospects. But over time, we see that most stocks trade based on sentiment or the actual supply/demand realities of a much broader investor community.

Social platforms are ideally positioned to capture the "buzz" (pardon the pun) that Trump creates. At BUZZ, the company I founded and serve as CEO, we view Trump's comments as akin to an "opening bid", a point-of-view that engages thousands of investors to share their own thoughts on the prospects of a given stock.

Some may agree with us on this; others may not. But our point is that Trump's tweets serve as a catalyst that enables investors to focus on a particular theme and then engage with others to validate or refute the view. Therein lies the true opportunity: to listen in on these conversations and identify sentiment patterns around the stock. Sentiments that represent the collective view of the investing community.

There are several insights from the BUZZ Index which highlight how our theory pays out:

General Motors (NYSE: GM). On January 3rd, Trump tweeted:

General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers tax free across border. Make in U.S.A. or pay big border tax!

GM opened the trading day higher and has continued to rally since the tweet. Here we can see in real-time the "diminishing returns of influence" I describe above. One might have (incorrectly) assumed that "big border tax(es)" would be negative for GM and its earnings potential. In fact, the broader conversation that the President started (the tweet had nearly 10k replies, 19k retweets and 75k likes) sparked a conversation about the investment merits of GM. We observed sentiment relating to those discussions as generally bullish and GM was added back into the BUZZ Index on the January rebalance date. The stock has rallied since.

Source: BUZZ Indexes

Boeing (NYSE: BA). On December 6th 2016, Trump tweeted:

Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!

Boeing stock opened 1.5% lower following the tweet. Note, this tweet was a surprise to investors and the "diminishing returns of influence" factor had yet to fully establish. Again, insights from the broader conversation that the President started (the tweet had nearly 21k replies, 43k retweets and 143k likes) provided more meaningful insight. Boeing had been viewed positively by the community prior to Trump's tweet. His comments did not alter sentiment, as Boeing remained in the BUZZ Index in both the December and January rebalance dates (the stock has since rallied to all-time highs).

Source: BUZZ Indexes

The Financial Select Sector SPDR ETF (XLF). The financial sector is a good example of the indirect benefits of having a President who tweets about stocks. Despite not posting a tweet directly supportive of U.S. financial stocks, investors have taken to social platforms to engage and share their views regarding the sector's prospects under the Trump administration. Unsurprisingly, the tone of the conversation has been decidedly bullish. That sentiment has been reflected within the BUZZ Index, with financials averaging a 6% weight in the index post-election, up nearly four-fold from their 1.5% weight in October.

Investor Takeaway

Investors should pay attention when President Trump tweets about individual companies or policy initiatives. Trading directly based on the sentiment of the President's tweets should be avoided. Opportunities for investors lie in accessing insights from the much broader discussion that results from the original Trump tweet.

Sentiment insights from the broader investment community may either refute or validate the sentiment expressed by the President and serves as a better gauge of the forward prospects and performance of a given stock. President Trump's tweets serve as the catalyst for a broader conversation from which more robust insight can be gleaned.

Investors should monitor the biotech and healthcare sectors as Trump actively tweets about drug prices and policies in that regard. In addition, manufacturing companies and exporters may all be affected by proposed protectionist measures of the new administration. BUZZ Indexes will continue to listen closely to the investment views expressed across social platforms to confirm or refute the sentiments expressed by President Trump.

Advances in Artificial Intelligence and Natural Language Processing technologies enable investors to harness the vast social dataset to identify actionable investment insights about individual stocks. The way in which information is assembled to analyze companies and forecast stock prices has changed for good.

Disclosure: I am/we are long BUZ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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