Donald Trump is a businessman. It is on these five words that the new president-elect built the foundation of his campaign messaging—a man outside the system, who, as a self-proclaimed private sector success story, could finally deflate Washington, D.C.’s bloat. Already, we have seen how that message might morph into action. Gone are the days when a president might dance around direct comments on corporate America, speaking instead only after a statement was carefully crafted. In its place, we have Twitter. And where Trump’s tweets were once reserved for personal attacks against political opponents or the media, we now have public shaming of American business.
What could possibly go wrong?
“It’s not unprecedented for presidents to move the market,” says George Pearkes, Macro Strategist at Bespoke Investment Group. “It is unprecedented for presidents to so casually—and almost like he doesn’t know he’s doing it, or what the impact of his words will be—do it on a regular basis.”
Three times so far, as president-elect, in fact.
Trump’s business beefs
Trump’s conflict with Carrier, the makers of air conditioners and heaters, goes back to February, when a video appeared online of a group of Carrier employees apparently being laid off en masse. The company announced around the same time that it was planning to move operations in Indianapolis—and 1,400 jobs—to Mexico. Three weeks after he was elected, Trump announced, via Twitter, that he had reached an agreement with Carrier to “keep our companies and jobs in the U.S.” In short, the deal provided US$7 million in state tax incentives to prevent Carrier from laying off workers. Trump said the deal saved 1,100 jobs.
The deal was immediately panned.
“For all of Trump’s tough talk about companies facing consequences for moving jobs out of the United States, it appears that his plan in practice is to line companies’ pockets as these companies continue to lay off their workers,” critics railed in Newsweek.
The union boss whose workers were affected by the deal felt similarly. When asked on CNN whether Trump’s claims that he saved 1,100 jobs from going to Mexico was true, Chuck Jones, the president of the United Steelworkers Local 1999, replied simply: “No, ma’am.” Jones commended Trump for saving as many jobs as he could, but he said the figure Trump used was inflated, and included more than 300 jobs that were never slated to leave the United States. Jones later also told the Washington Post that Trump “lied his ass off.”
Trump went on the attack—on Twitter. Jones, Trump wrote, “has done a terrible job representing workers. No wonder companies flee country!” He then followed up with some advice, tweeting that if the USW Local 1999 “was any good, they would have kept those jobs in Indiana. Spend more time working—less time talking.” The effect was almost immediate. According to the Post, “half an hour after Trump tweeted about Jones… the union leader’s phone began to ring and kept ringing. One voice asked: What kind of car do you drive? Another said: We’re coming for you.”
Boeing, maker of the 747 airliner, was next.
“Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!” Trump tweeted on Dec. 6. Trump was, again, only partially correct in his assertions. There are to be two new Air Force One planes, not one, and the budget of US$4 billion is the subject of some discussion—in short, the price hasn’t been set yet.
Trump hit publish on his anti-Boeing missive at 8:52 a.m., just over an hour after the Chicago Tribune published a story reporting that Boeing’s CEO, Dennis Muilenburg, “suggests the Trump team, and Congress, back off from the 2016 anti-trade rhetoric and perceived threats to punish other countries with higher tariffs or fees.” Whether the two things were connected is unknown, but the fallout was measurable. After Trump’s Air Force One tweet, Boeing shares dropped nearly one per cent—or equal to about US$1 billion of the company’s overall value.
A week later, Trump turned his attention to Lockheed Martin, the main contractor for the F-35 fighter jet program—a multi-billion-dollar, multi-year program that has come under endless scrutiny for being both delayed and over budget. On Dec. 12, Trump tweeted that the “F-35 program and cost is out of control,” and promised that “billions of dollars can and will be saved on military (and other) purchases” after he takes office. Lockheed’s stock price dropped from US$259 to $246, wiping out around US$4 billion off the company’s market value.
Stock market is acting as if each Trump Tweet is government policy. Lockheed -3% on remark regarding F35 costs. Judge, jury, executioner.
— David Baskin (@DavidBaskinBWM) December 12, 2016
Policy by tweet isn’t the exclusive domain of Trump. Last September during the campaign, Hillary Clinton tweeted an attack on drug companies for price gouging, after which biotech companies shed a combined $132 billion in market cap. The difference now though, is that Trump is officially headed to the White House, and his ongoing and unpredictable attacks on individual companies will begin to carry far more weight.
A volatile future?
Lisa Kramer, a professor of finance at the Rotman School of Management at the University of Toronto, agrees Trump has created a new communications reality.
“It’s uncharted territory, and it raises concerns about the potential for volatility,” she says. “When these kinds of off-the-cuff remarks come across, there is the potential for the market to react in an unpredictable way, and in a way that causes the markets to become more risky than they would be in absence of those kinds of tweets.”
And yet, despite it all—and individual share price drops—U.S. markets have rallied strongly since Trump was elected, with the Dow Jones Industrial Average index up nearly eight per cent. In fact, stock market volatility is at an all-time low, while global policy uncertainty has never been higher—and the gap between the two never wider.
“I think people are mostly looking past it, currently, which seems kind of crazy,” says Pearkes. “The price action since the election has been very optimistic, and it’s really hard right now culturally and, I think, in the face of price action, to say: ‘Hold on a second, this is not normal, this is not something that should be good for stocks.’”
In the face of policy decisions coming from the president seemingly without warning, asset prices would typically require a risk premium to account for the apparent uncertainty of events, Pearkes says. But again, that hasn’t happened. In fact, the opposite has occurred.
“Since the election, risk premiums on a number of assets have come down quite dramatically,” Pearkes says. “Squaring that circle is hard to do without sort of just assuming that the market is wrong.”
Kramer and Peakes both offer that, in the face of potentially unprecedented change, the market has so far banked on the system holding.
“I think everybody is hoping that somehow, once he assumes office, that some semblance of normalcy will prevail, that he will have to be bound by the constraints of working within the two-party system, and so on,” says Kramer.
But what if that normalcy never comes? What might happen if Trump continues to opine, without warning, on major U.S. corporations and government contracts?
One solution being cooked up is to predict Trump’s Twitter in real-time. In order to try to cash in on the president-elect’s words, high-speed traders “now have a new opportunity to bet against the companies Trump criticizes and for those he praises,” Politico reported last week. “Savvy traders can also expect the market to overreact to Trump tweets and then capitalize when battered shares bounce back… Some traders are already working on programming Trump’s tweets into their computer trading models.” This might mean designing algorithms that instantly detect tone in the language Trump uses in his tweets, in order to immediately buy or sell.
Pearkes wishes them “good luck,” and points out there are protections in place for corporations that might become a Trump target.
“For a number of companies, there are protections around this in terms of what the executive branch can do. So, for instance, the federal rulemaking process—there are all sorts of court provisions about arbitrary and capricious rule makings,” says Pearkes. “There is actual legislation that does prevent the executive from just doing what it wants.”
Moreover, a company’s value is based on more than what the president decides to say about it, says Kramer, and one tweet can’t change those fundamentals. Yet, the tweets are not guaranteed to solely focus on major corporations. A tweet that signals a major tax or policy change that could undermine the viability of businesses hasn’t happened yet—but it could.
From UBS. Basically, Trump policy is not real until it’s tweeted. Funny old world. pic.twitter.com/2USfIo9Fw9
— Katie Martin (@katie_martin_fx) December 8, 2016
And then there is the larger potential for a chilling effect. Kramer points to Trump’s attack on Jones, the union leader, as an example.
“It’s a dangerous time to be in the president-elect’s bad books,” she says. “I mean, all bets are off. It’s really difficult to predict what’s going to happen.”