As Donald J. Trump was inaugurated the 45 US President today, he did so with his Twitter feed ablaze with 11 Trump tweets. While it is unknown if the decidedly generic if mild-mannered tweets were from his own hand, an automated timed software program or an aide, the issue of the US President moving the market with tweets was addressed by the Bernstein quantitative team. The problem for active managers is that the Presidential tweets can be unpredictable relative to idiosyncratic corporate targets and are likely to punish active investment managers most.

Trump Tweets

Forecasting Trump tweets is the problem

To model Trump tweets, Bernstein’s quantitative analyst Inigo Fraser-Jenkins needed to make assumptions. This included a proclivity for the President’s “fondness for abrupt, direct statements about things that he doesn’t like.” This activity is likely to put the investment work in a position where one tweet can lead to “well… almost anything really.”

While anything can happen, when it relates to individual stocks the likely outcome that matters to active investors is going to result in idiosyncratic stock risk. Trump tweets are not as likely to move entire markets to the same extent as an individual tweet when it negatively targeting shares of publicly traded corporations might. In other words, diversification is a risk management method to protect against risk associated with Trump tweets.

While idiosyncratic market events are normally a stock picker’s market environment, as it relates to Trump tweets the downside risk is higher than the upside for individual issues. Thus far, when Trump has mentioned individual corporates, the negative market reaction has significantly outpaced positive price appreciation.

Trump tweets create environment for diversified, passive investing

While the Trump era has been hailed by some as a strong environment for active investing, Bernstein provides a counterpoint. The “problem” with Trump’s tweets is a modeling difficulty. Tweets, you see, are difficult to predict and might lead to a market environment that aides passive investing, Jenkins observes.

Judging by his past tweets, if the negative impact is likely to disproportionately target one share over another, then the general risk to investors is to the downside.

Typically, a market environment that features low correlation is positive for stock pickers. But in this case, when the performance driver has a history of being more negative on individual issues than positive, the tweet might be the exception to the correlation rule.

For investors, Jenkins thinks that “habitual” tweeting is a habit that will introduce portfolio risk, so get ready.