Investors Grapple With Tweet Risk In Trump Era

SMITH BRAIN TRUST — When President-elect Donald Trump took to Twitter to criticize Lockheed Martin for the price tag on the F-35 fighter jet, he sent the defense contractor’s shares into a minor tailspin. A similar thing happened weeks earlier, when he tweeted a rebuke of Boeing for the price of the new Air Force One.

With the Oval Office soon to be occupied by a Tweet-prolific commander-in-chief, investors are grappling with a new market force: Tweet risk. It’s what happens when Trump unleashes a seemingly out-of-the-blue Twitter takedown and investors react.

Donald Trump by Gage Skidmore on 2011-02-10 12:47:12
Donald Trump

The initial impact looks dire and swift – a sudden 2 or 3 percent drop in a company’s share price. For a company the size of Lockheed Martin or Boeing, the drop amounts to billions in market value.

But the impact observed thus far largely has been fleeting, says David Kass, clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business. “Within a relatively short period of time, a week or two, these stocks have recovered and actually moved higher,” he says.

There are plenty of examples. In addition to Boeing and Lockheed Martin, there was tweet-to-market fallout for General Motors, Toyota and Carrier parent United Technologies.

“He has been inserting volatility on seemingly random stocks,” says Smith School associate professor Nick Seybert.

In the global currency market, meanwhile, Trump’s tweets have been blamed for battering one currency in particular – Mexico’s. Foreign exchange traders, exasperated by @realDonaldTrump-induced volatility in the USD/MXN trading pair, have been half-jokingly floating the idea that Mexico’s central bank should refrain from further intervention to stabilize the peso, and spend the money to buy Twitter instead. And then shut it down.

All U.S. presidents inherit the power to move markets with their words. President Barack Obama put financial stocks under pressure at various points throughout his presidency, castigating Wall Street for abuses that led to the financial crisis.

Seldom have U.S. presidents called out individual companies, as Trump has done since the election. John F. Kennedy memorably chastised U.S. Steel and the broader steel industry in April 1962 for dramatically raising prices, Kass recalls. Shares in the steel giant slumped for days, and dragged down much of the stock market.

“Given Donald Trump’s track record of singling out companies, which hasn’t been done to this extent by any other president, companies should be a little more circumspect. They should be thinking about what their policies are, what their pricing practices are,” Kass says. “This certainly is highly unusual.”

Kass also recommends that companies make bigger, splashier announcements out of routine news that’s likely to earn Trump’s praise on Twitter. For example, U.S. hiring plans, expansions of U.S.-based factories or other U.S.-based investments. Some companies are already doing this, Kass says, citing Amazon’s recent announcement of its plan to create 100,000 new jobs in the U.S. in 2017, and Lockheed Martin’s announcement last week on Twitter, that it would add 1,800 new jobs in the U.S.

Most, if not all, of the publicly traded companies that have been singled out in Trump’s tweets have seen their shares fall, snap back and ultimately move higher. And that trend brings an opportunity for traders.

“If I were a trader, I would wait for the 2 or 3 percent drop and buy at that bottom and wait for the stock to recover,” Kass says. That may already be happening, says Seybert, who teaches a course that covers financial statements and stock price analysis.

Trump last week was quoted in a German newspaper, warning that country’s automakers that any vehicle imported into the U.S. would face a stiff, 35 percent tax. The news sparked a sudden, 2 percent drop in shares of BMW and Mercedes, and dragged down other automakers as well.

The stocks have since recovered, Seybert notes, likely in part because of bargain hunting from investors who have sophisticated financial models that determine what the stocks are worth.

If the U.S. were to impose a 35 percent tariff on auto imports, however, the real impact for automakers such as BMW or Mercedes would be massive. Seybert ran the numbers. Based on the number of sales BMW does in America, he says, its stock should have dropped by about 10 percent.

Investors are betting that the 35 percent tariff is never going to happen. And they’re betting that Trump’s tweets will have limited influence over consumer behavior. It’s a gamble.

“Half the country did vote for him,” Seybert says, “and some people do like him and listen to what he says.”

It’s not a simple strategy, and no strategies are fail-safe. “Investors in general should have a long-term horizon, similar to Warren Buffett, of at least five to 10 years,” says Kass, who has closely followed Buffett’s investment philosophy for more than 35 years. “If you have a long-term horizon of at least five to 10 years, then none of these tweets should bother you. It’s just noise.”

 

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About the Author

Dr. David Kass
David I Kass Clinical Associate Professor, Department of Finance Ph.D., Harvard University Robert H. Smith School of Business 4412 Van Munching Hall University of Maryland College Park, MD 20742-1815 Phone: 301-405-9683 Email: [email protected] (link sends e-mail) Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Accelerated Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), Fox TV, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.

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