Since the election, I’ve repeatedly bemoaned the fact that we are now forced to trade in a 140-character world.
Here’s what I said “way” back in December:
As for Trump being the living, breathing, embodiment of a tail event, note that the commander-in-chief in waiting fits the definition of a “grey swan” quite nicely and nowhere is this more apparent than in his tweets about publicly traded companies. These tweets are “rare” (as a percentage of the total number of Trump tweets we get in any given timeframe) but “expected” (we know that sooner or later, he’s going to tweet something that moves markets). That matches Nassim Nicholas Taleb’s definition of a “grey swan” perfectly.
How, as investors and traders, are we supposed to deal with this? How can we be confident that we haven’t just made a trade that will move against us thanks to a couple of deft taps from Trump’s (small-ish) thumbs? How frustrated will we be when we lose money not because an analyst downgrades one of our holdings (and if you’re connected at all, you’ll probably know ahead of time if the axe is about to drop on a name you own) but because the leader of the free world fired off 140 characters at 3:16 in the morning?
As we’ve seen lately, Trump tweets can move stocks in ways we might not have expected. Shares of Nordstrom rallied sharply following the President’s Twitter assault on the retailer for dropping the royal daughter’s merchandise.
But that doesn’t change my thesis. Bottom line: it’s absurd that “tweet risk” has become part of the Wall Street lexicon.
Well, in what can only be described as a sign of the absurd times in which we live, breathe, and trade, Goldman is out on Wednesday with “a study of stock volatility on Trump tweets.”
Yes, I am deadly f*cking serious.
In collaboration with our Sector Specialists and Industry Analysts, we compiled a list of 33 policy related comments and meetings held by President Trump since election day. Our goal in analyzing these events is less about finding a systematic trading strategy and more about identifying the stocks with the potential to be volatile on upcoming policy comments. To that end, we included only events where President Trump’s comments could directly affect the fundamentals of a specific company or group of companies rather than just including all mentions of a company.
Volatility has been unusually large in the two days following the president’s comments/meetings. We calculate the 2-day trading range of each security as a percentage of the closing price on the day before the comment or meeting. We compare this to the average absolute 2-day return for each security over the prior year. We find, on average, these 90 securities had a 2-day trading range that was 3 times their average 2-day move over the past year. Even after excluding the top and bottom 10 names to eliminate outliers, stocks traded in a range that was 2.6 times more volatile than the past year.
Stock volumes nearly double on the day of the President’s comments. In Exhibit 15, we show the average daily value traded for each day over the past year relative to the average value traded in their prior 20 business days. We find that the value traded is up over 90% on the day of the comments, dramatically higher than any other day of the year on average. We see this as evidence that the stocks are moving due to high volume traded on these news events.
And, to answer “the question that’s on everyone’s mind”…