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By Carmel Fisher, Managing Director
16 December, 2016
You know the investing world is changing when a tweet from the US President-elect causes a company's share price to fall one per cent in a matter of seconds.
Investors already have a hard enough job, sifting through news feeds and identifying which snippets are important, factual and need to be acted on.
It would be hard for the 24 gentlemen who started the New York Stock Exchange in the 1700s (by trading shares on the footpath of Wall Street) to imagine the stock market could be influenced by a tweet.
For 200 years, shares were traded the old-fashioned way. A buyer and seller would agree a price for a stake in the business, they would shake hands and the deal would be completed.
In the 1970s, the handshake became an electronic one when a networked trading system was established allowing trades to become faster, more efficient and less transparent. Old-fashioned investors have learned to cope with the continued evolution of trading which now has algorithms placing trades at a speed and frequency impossible for a human trader.
Trades driven by the random tweets of a president take the challenge to another level altogether.
Last week Donald Trump decided he'd had it with Boeing and threatened to cancel the company's Air Force One contract. At 8.52am on Tuesday December 7, Trump tweeted: "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!".
After 10 seconds the Boeing share price slumped, falling nearly two per cent before recovering later in the day.
Perhaps one of the reasons the price recovered was the market discovered Trump's tweet was factually incorrect. Within two hours of the tweet, Boeing issued a statement saying the company's contract is for $170 million over 10 years, representing just 0.2 per cent of the company's 2015 revenue.
While the figures were ambiguous, the tweet was nevertheless harmful to Boeing and forced the company to allay investor concerns. It also sent a warning to corporate America — who would be next to incur Trump's wrath?
Twitter is not the only media to watch. Also on December 7, Time magazine published the transcript of a Trump interview in which he said: "I'm going to bring down drug prices. I don't like what's happened with drug prices."
That day the Nasdaq Biotechnology Index was down as much as 4.6 per cent, its largest intraday fall since June.
If Trump continues to tweet and comment without letting facts get in the way, investors may have to get used to individual stocks, groups of stocks, and possibly whole markets being moved in unexpected ways.
One commentator suggested ambitious investors could research companies planning to move jobs outside the US, especially those with significant government contracts, and sell their stock. Investors could similarly buy stocks in companies investing in the US — like Softbank, whose share price lifted 5.5 per cent after Trump praised its planned US$50 billion investment.
But it is hard to imagine a reasoned and well-researched investment strategy will be successful when the comments in question are neither.
One thing is certain: Twitter, Facebook and Google have a lot to answer for. The billions of events, thoughts and "likes" that form today's news don't get checked for fact or truth — but they nevertheless influence our behaviour in unexpected ways.
Investing just got harder. Bring back the handshake.
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