Since its tax-bill peak nineteen months ago, the Dow Jones Industrial Average has barely moved – up only 180 points (0.7%) from 26,617 to 26,797. However, in terms of daily point moves (up or down), the DJIA has gone around the world three times: Traveling fully 75,000 points, with much of that driven by President Trump’s tweets.
But that huge number understates the large tweet-risk: the gap effect from tweets made during non-trading hours. Think of it this way: When gaps are meaningful, a day’s move is composed of two, distinct movements: the gap and then the stock market’s trading day. When the gap and the day’s trading are in the same direction, the day’s move is the sum of the two movements. However, when they are in opposite directions, the day’s move is the net, hiding the two, distinct price shifts. (For example, Friday, August 30, had a gap up of +114 points, then a trading day loss of -73 points, for a mild-looking net rise of +41 points. However, the real effect to investors, as reported in the media, was the reason for the large gap up, followed by the explanation of the offsetting decline.)
Separately, all the gap moves add up to 31,000 points, and all the daily trading moves add up to twice that – 62,000 points. The “felt” moves for someone watching the daily markets, then, was a whopping 93,000 points.
Tweet-risk comes from those unsettling “Surprise!” announcements emanating from the White House during after-hours trading. Many tweets throw sudden new information into the mix that may or may not result in dramatic changes.
Compounding the effect of this flow of unexpected declarations is the uncertainty of whether this proclamation will stick or join the list of tweets later altered, abandoned or reversed.
Tweets can buffet the market (and our psyches). So, how large has the tweet disruption been? Below is one measure of the damage done, both factual and mental.
Gaps measure surprise effects
The gap between a previous day’s closing price and the next opening gives a news announcement an estimated size. (The common example is a company’s earnings report that is wide of analysts’ expectations.)
So, let’s apply the gap analysis to the market and Trump’s tweets. No, I am not going to tackle the lengthy list. Rather, we can examine the market’s gap behavior during Trump’s three periods: (1) Pre-election (From June 15, 2015, announcement to election), (2) Tax-bill period (election through January 26, 2018), and (3) Initial tariff announcement through today.
We know Trump’s tweet strategy has evolved, increasing in number and impact. This graph shows the three periods, with each dot representing a daily gap (as a percent of the previous close). Note the visible increase in gap size. Clearly, this tariff period is where the largest impact has occurred.
The lack of lasting effect
Reversals, reality and Wall Street’s reactions have produced a volatile, yet flat stock market for the nineteen-month, tariff-tweet period. Sorting the daily gaps shows the near equal distribution of downs and ups, with an average of only 0.02%.
Another indicator of the lack of lasting effect is the clear whipsaw action, even from one day to the next.
The bottom line
President Trump’s tactic of tweeting provocative, market-moving messages has produced no real movement in the stock market. However, it has produced both large stock market volatility and investor confusion and concern.
The Chinese solution to the tweets: Ignore and focus on the future
In the Bloomberg article, “Traders Fixate on Trump’s Twitter Everywhere, Except in China,” Chinese investment managers express their views of how to view and react to President Trump’s tweets.