In 2017, finance professors Jeffery Born and David Myers, along with student Will Clark, were searching for a meaty topic for a research project when they realized the perfect idea was right in front of them, on their Twitter feeds.
President Donald Trump had posted several tweets (some negative, some positive) in which he singled out publicly traded companies like Ford and Boeing. Born and Clark wondered: Were tweets from the leader of the free world helping or hurting the companies' stock prices and value—or having no effect at all?
“Past presidents communicated through the media. This was the first time that a president was communicating directly with the public—with investors—about companies. We really weren't sure what to expect from the data,” says Clark, DMSB'17, who is now a credit analyst with Morgan Stanley.
Born, Myers, and Clark reviewed the 15 tweets Trump posted from Election Day (Nov. 7, 2016) to Inauguration Day (Jan. 20, 2017) that praised or condemned 10 publicly traded firms. (Trump rarely mentioned companies by name before or after this period.) For example, in a Jan. 5, 2017 tweet, Trump criticized Toyota's plan to build a Corolla manufacturing plant in Mexico. On Jan. 17, 2017, he praised Walmart and General Motors Co. for expanding jobs in the U.S.
The trio analyzed data and statistics to place the tweets in context—measuring how the tweets' effects stacked up against historical trading volumes and stock prices. (Many media outlets had reported same-day boosts or declines in the companies' stock prices, but failed to cite historic averages or overall market performance.)
The team found that Trump's tweets dramatically increased trading volume for the companies' stocks in the first few days following a tweet. They also found that positive (or negative) tweets about companies increased (or decreased) the firms' stock prices by a modest amount—just 1 percent. But the changes were only temporary: Within a few days, the firms' trading volumes and stock prices returned to pre-tweet levels.
Thus, Trump's tweets caused a tremor but not a tsunami in trading and value.
“Prices went up or down, then that movement quickly evaporated,” Born explains of the findings, which were published recently in the prestigious journal Algorithmic Finance. “There was not a permanent increase or decrease in the prices of stocks he mentioned. They jumped up or down then settled back in again.”
Why didn't a public tongue-lashing from the world's most powerful man sway the stock market? Born points out that what traditionally drives stock prices and value is new information (news or announcements) about a company. But none of Trump's company-specific tweets contained new information; all were his comments or reactions to company news and information that had already been made public.
“His tweets weren't the companies themselves announcing, ‘We're closing a plant or launching a new product.' It was Trump giving his opinion on information that was already known to the world of investors,” says Born.
The research trio made another discovery as they delved into who, exactly, was doing the trading after Trump's company-focused tweets. They studied Google search activity for each company in the days following Trump's tweets. Search activity spiked then quickly tapered off—a sign that the traders were most likely small-time investors called “noise traders” who tend to react impulsively to market news.
“They're regular people and under-informed investors who want to get in and out and make a buck without thinking too long and hard about it,” Born says. Institutional investors, such as large investment firms, instead rely on sophisticated data and information from market analysts and publicly traded firms, he says.
The study's big takeaway should be comforting to any investor, Born says: The stock market is unlikely to soar or dive based on the remarks of even the most high-profile person.
“One person can't jump on a soapbox and move a stock significantly up or down—not in the presence of a lot of well-informed market participants. Maybe in the short term, someone can nudge a stock one way or the other, but permanent changes in value require something more substantial,” Born says.
“The market may, from time to time, get moved by emotional forces, but that tends to be short-lived. Ultimately, rationality rules the day.”