Trumped by Tweets

By in

Market capitalization (“market cap”) refers to the total dollar market value of a company’s outstanding shares.. “Market cap” is calculated by multiplying a company’s shares outstanding by the current market price of one share. The finance industry uses this figure to determine a company’s size, rather than using sales or total asset figures. Using market capitalization to show the size of a company is important because company size is a basic determinant of various characteristics — including risk.

In the age of social media – and with such an extensive reach – Twitter has become an invaluable communication tool for many, including politicians looking to directly address their constituents on matters of policy and culture.
The 45th President of the United States of America, Donald J. Trump, is only the second sitting President in history to actively engage the use of the social media platform. President Trump has used Twitter to address the public on a wide variety of topics including the addressing of individual companies, countries and future U.S. policy towards commerce. Consequently, his Twitter feed has become an influential, market-moving force.

The real question then becomes, is it ethical for a sitting President to tweet about topics that can move markets? Could this be considered a case for market manipulation?

Trump Tweets are nothing new. In 2016, Trump’s pre-inauguration tweet aimed at Toyota Motor Corporation’s (ADR) cited, “Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.”1)

The fallout experienced by Toyota was considerable. The company’s stock saw immediate devaluation, losing $1.2 billion in market cap in the five minutes following the tweet.2) Over the next six months, Toyota stock lost over 5%, around US $12 billion.

Ivanka Trump’s fashion line, once occupying space in the retailer Nordstrom, was discontinued in the first quarter of 2017 due to ‘poor sales.’ President Trump issued a statement via Twitter which resulted in an $86 million market cap loss: “My daughter Ivanka has been treated so unfairly by @Nordstrom. She is a great person–always pushing me to do the right thing! Terrible!”3) In contrast to Toyota, the negative effects were fleeting. Nordstrom stock fell 1% in the minute following the tweet and recovered in the same session.4)

Perhaps the most hated enemy of the current US president – and the most badly affected by a Trump tweet – is Amazon (AMZN). On March 31, 2018, a tweet from Trump surrounding the loss of $1.46 average by the US Postal Service for each package it delivers for Amazon caused Amazon’s market cap to fall an astounding $30 Billion.

There are numerous instances of Trump tweets impacting market cap including Intel (INTC), Aetna (AET), Humana (HUM), Pfizer (PFE), Merck (MRK), Anthem (ANTM), among others. Although each of these companies have sustained little impact in long term losses, the focus remains on short term losses. In the current economic environment which now regularly sees 700+ point swings in a trading day, the Trump tweets do little to help and arguably fuel the fire of temporary market cap draw-downs.

It is important for market participants to be cognizant of the potential volatility increases related to Trump tweets. Unless one has a crystal ball, it’s nearly impossible to know just which company will be the next target of a Trump tweet. Though the next target is unpredictable, being aware of which companies or products are most sensitive can greatly limit risk for investors. Remembering the impact is most likely short term so a panic-sell should be avoided.