Tweets can be market movers but are they enough to trade on?

Tweets can be market movers but are they enough to trade on?

A single tweet can move markets but are they enough to trade on? We look at the impact of social media on capital markets. #goodread

In mid-August, a single tweet by U.S. President Donald Trump wiped over US$5 billion off Amazon’s stock valuation.

“Amazon is doing great damage to tax-paying retailers. Towns, cities, and states throughout the U.S. are being hurt – many jobs being lost!” wrote the president. The company’s shares dipped 1.2 percent of their value in the two hours of pre-market trading after the tweet before slowly regaining lost value. Screen Shot 2017-09-06 at 3.59.54 PM

It wasn’t the first time the U.S. president had pointed his Twitter lasers at a publicly traded company. Toyota lost US$1.2 billion in five minutes after Trump sent out a tweet vowing to stop their move into Mexico and his 140 character gripes with defense giants Boeing and Lockheed Martin brought those companies down US$1 billion and US$3.5 billion respectively.

But the effect of Twitter rants on the capital markets, at least in the case of Trump, is overplayed, according to The Wall Street Journal. The WSJ created a “Trump Target Index” of 12 stocks to track the movement of shares after the president directly criticized them on Twitter or publicly.

Their findings: most companies had rebounded in the same day Trump mentioned them. But that doesn’t discount the overall effect of social media on the capital markets.

A Legacy of Maverick Tweets

Since it gained momentum, there’s no question Twitter has been a market agitator. Sure, small-time fraudsters have used social media in pump and dump schemes but it’s the louder voices that seem to have the biggest effect.

Billionaire and activist investor, Carl Icahn is a prime example. His tweet on August 13th, 2013 – “We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come.” –  launched Apple’s stock upwards within minutes, boosting the tech company’s market cap by US$17 billion. Ultimately, the price ended up settling lower in October than it was in August 2013; an impermanent effect.

Icahn's Apple tweet

Fake Tweets!

Fake news has its own sway over the capital markets. In 2013, a fictitious news report on a hacked Associated Press Twitter feed falsely reported two explosions at the White House with injuries sustained by then-president Barak Obama. Within minutes, U.S. equities markets plunged, the Dow Jones Industrial Average dropped 143.5 points and the S&P 500 lost close to US$136 billion in value. The turnaround time was quick, with shares recovering once the news was outed as fake.

But real news shared through Twitter can have a sharp effect as well, one that isn’t always easy to rebound from. A Maryland train collision in May 2016, and subsequent Twitter updates from the locals drove the stock of transportation proprietor CSX Corp down $500 million in market cap.

Twitter-casting the Future

There’s a whole cottage industry built around tracking Twitter sentiment and the effects of social media on stock prices but from a top-level view, financial markets aren’t fond of uncertainty and Twitter is a great disseminator when it comes to volatility. Whether it’s a well-known personality with rabid followers who hang on every word or insider news leaking through social media, the effects – positive or negative – are, without question, volatile.

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So, should you trade on tweets and social media sentiments? While there are lots of investors who trade on overreactions, it takes a high-frequency trader to keep pace with the sort of volatility Twitter creates and the only way to beat that sort of trading is to have a longer time horizon, with stocks that fit your fundamentals, Josh Brown, chief executive of Ritholtz Wealth Management and the man behind the Reformed Broker website told the LA Times.

It takes a special kind of trader to chase tweets.

“Can you imagine Warren Buffett trading on someone else’s tweet?” Brown said. “It would never occur to him.”