How Should Investors Address “Trump Tweet Risk”?

I am quoted in a University of Maryland Smith Brain Trust article, “In Era of Trump, Investors Grapple with Tweet Risk”:

When President-elect Donald Trump took to Twitter to criticize Lockheed Martin for the price tag on the F-35 fighter jet, he sent the defense contractor’s shares into a minor tailspin. A similar thing happened weeks earlier, when he tweeted a rebuke of Boeing for the price of the new Air Force One.

With the Oval Office soon to be occupied by a Tweet-prolific commander-in-chief, investors are grappling with a new market force: Tweet risk. It’s what happens when Trump unleashes a seemingly out-of-the-blue Twitter takedown and investors react.

The initial impact looks dire and swift – a sudden 2 or 3 percent drop in a company’s share price. For a company the size of Lockheed Martin or Boeing, the drop amounts to billions in market value.

But the impact observed thus far largely has been fleeting, says David Kass, clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business. “Within a relatively short period of time, a week or two, these stocks have recovered and actually moved higher,” he says.

There are plenty of examples. In addition to Boeing and Lockheed Martin, there was tweet-to-market fallout for General Motors, Toyota and Carrier parent United Technologies.

Seldom have U.S. presidents called out individual companies, as Trump has done since the election. John F. Kennedy memorably chastised U.S. Steel and the broader steel industry in April 1962 for dramatically raising prices, Kass recalls. Shares in the steel giant slumped for days, and dragged down much of the stock market. 

“Given Donald Trump’s track record of singling out companies, which hasn’t been done to this extent by any other president, companies should be a little more circumspect. They should be thinking about what their policies are, what their pricing practices are,” Kass says. “This certainly is highly unusual.”

Kass also recommends that companies make bigger, splashier announcements out of routine news that’s likely to earn Trump’s praise on Twitter. For example, U.S. hiring plans, expansions of U.S.-based factories or other U.S.-based investments. Some companies are already doing this, Kass says, citing Amazon’s recent announcement of its plan to create 100,000 new jobs in the U.S. in 2017, and Lockheed Martin’s announcement last week on Twitter, that it would add 1,800 new jobs in the U.S.

Most, if not all, of the publicly traded companies that have been singled out in Trump’s tweets have seen their shares fall, snap back and ultimately move higher. And that trend brings an opportunity for traders. 

“If I were a trader, I would wait for the 2 or 3 percent drop and buy at that bottom and wait for the stock to recover,”  Kass says. 

“Investors in general should have a long-term horizon, similar to Warren Buffett, of at least five to 10 years,” says Kass, who has closely followed Buffett’s investment philosophy for more than 35 years. “If you have a long-term horizon of at least five to 10 years, then none of these tweets should bother you. It’s just noise.”