Firms like Goldman Sachs once believed the presidential account was uncorrelated to market results, but years of cumulative stress have been brutal.
We tell our clients not to worry about aspects of the market that are beyond anyone’s control. Fighting the Fed or other inevitable macro catalysts is as futile as fighting the weather.
But over the last few years, a few of the smartest people on Wall Street made a conscious effort to fight the weather emanating from the White House social media feed.
They bragged a lot early on about how easy it was to plug the Twitter algorithms into their trading systems. When they heard the thunder from Washington, they sold the stocks on Trump’s mind.
After all, he generally only took to Twitter to berate companies that offended him. Those stocks went down.
Match the Twitter to the ticker and a clear signal to sell or short emerged.
However, we don’t hear a lot from those smart people now. The market learned to compensate.
And because the presidential feed remains fundamentally unpredictable, every effort to apply the Tweets to an investment posture devolved into pure reactivity.
You can’t plan around the feed. What the market learned was to flinch first and ask questions later.
The tide that grounds all boats
The challenge is that a Tweet can come at any time like thunder rumbling in a blue sky. Day and night, the feed weighs in on the corporate landscape, calls out companies by name and hints at potentially far-reaching government action.
In previous administrations, every utterance would have been treated as a serious communication from the people who make serious policy. The nuances were analyzed more finely than any quarterly report or Fed statement.
But after a few years of reversals, it became clear that the Twitter feed rarely followed through on promises and threats. Stocks initially shocked by a White House cold shoulder bounced back.
People who traded the Tweet needed to move fast to capture the discontinuity before it resolved. It was essentially like catching a “fat finger” with a few seconds of lead time.
And the problem there was that not all Tweets pushed stocks in the same direction. Some actually created an ultra-short-term lift, as we saw over and over when infrastructure booms were announced and never happened.
Simply programming an algorithm to jump at the Tweet was far from a sure thing. You still needed a human being in the loop to evaluate whether the catalyst was good or bad.
Human beings inserted into that kind of fast feedback cycle for extended periods get tired and twitchy. Like I said, we don’t hear about Twitter trading systems any more.
People gave up but the Tweets kept coming. As recently as a year ago, Goldman Sachs couldn’t find any correlation between the presidential feed and the VIX.
At the time, the statistics were interpreted as a sign that asset class by asset class, Trump wasn’t moving the market any more. We were theoretically over it.
Now, however, a different conclusion comes to mind. There’s nothing special about Trump Tweets because he’s on the platform all the time.
He’s always tweeting a lot, so the VIX never goes up when he’s active or down when he’s quiet. He’s never quiet.
And the VIX goes where it goes. From a distance, it’s just two weather systems interacting . . . difficult to trade unless you’re actively trading agricultural futures. (Sell soy.)
What firms like Merrill Lynch have discovered since is that it’s the rate at which the White House wind is blowing that matters.
A lot of Tweets from @realdonaldtrump is bad. It only happens on days the S&P 500 is headed lower.
As his activity cools, the market heats up. Stocks get a natural lift.
Causation, correlation, capitalism
Once again, however, counting the Tweets is only a reactive strategy. The president takes to his phone when the market makes him nervous, and only incidentally the other way around.
However, his social thunder still carries far and wide, creating a feedback effect. He gets nervous, we get nervous, he gets more nervous.
Correlation becomes its own causality and then the forces of blind capital flows take over. People with their eyes open can spot the discontinuities and take advantage, either by exploiting other people’s errors or simply steering clear.
It’s practically a fat finger trade, mashing buttons and awarding prizes to some while reducing predictability for the rest of us. Blink and it’s just the market as usual.
Either way, the interactions are far from rational in the classical economic sense. When the market stays irrational for extended periods, the sane response is to make sure you stay liquid.
That’s age-old advice. Stick to stocks with compelling fundamentals and current cash flow to reward long-term shareholders as needed.
If the world inches toward ending, most stocks will decline together, much as we’ve seen in recent dips. Everyone gets a little less wealthy, across the board.
Relative wealth levels are preserved. And when the tension relaxes, everyone gets a little wealthier again.
Alternative asset classes hedge the day-to-day risk like they always have. Real estate, precious metals and private equity are great ways to preserve wealth from the irrational ups and downs.
Granted, the Twitter-to-Wall-Street relationship is asymmetrical. He can always guide economic policy as long as he’s in office, even bending the Fed to his ear.
Wall Street can, at best, make him nervous enough to reverse course, which in turn creates its own set of disruptions and tensions.
As we all know, Wall Street hates uncertainty. Big money craves a clear path.
And markets get tired when the people in them break down under sustained stress. We’re a long way from there now, but it’s a necessary phase in any bottoming process.
If you’re selling the Tweet, you should’ve sold out by now. There’s no reason to come back. For the rest of us, it’s just another Wall Street weather cycle.
The thing about the weather is that if you wait around long enough, it changes. Most of the year is always going to be unsettled.
Even the presidential weather changes every term. Humans come and go, on Wall Street and in the White House, but institutions and long-term investment rules remain intact as long as they match reality.
We don’t necessarily need to be able to predict the lightning flashing from a clear sky to scorch some hapless stock or sector. All we need is a sense of how often it happens and where to stand to improve our clients’ odds of getting across the landscape in one piece.
