No one has ever used Twitter the way Donald Trump does. Whether it’s Fed-bashing or boasting about his achievements, day or night, true or false, 140 characters or 280, @realDonaldTrump channeling a president directly to the public is an unprecedented phenomenon.
The index wizards at JPMorgan Chase watched the impact of these tweets on market volatility increasing rapidlyOpens a new window during August and have devised a “Volfefe Index†— the name for a mash-up of volatility and “covfefe,†Trump’s famous, uncorrected typo for “coverage†in a 2017 tweetOpens a new window complaining about negative reports in the press — to track the impact of presidential twittering.
The JPMorgan analysts found that certain trigger words — China, billions and products at the top of the list — were the most market-moving, indicating that participants are more focused on the trade dispute with Beijing than with Trump’s dim view of the monetary policy followed by the US Federal Reserve.
Market comments, outsized impact
That makes sense. Trump is engaged in a dialogue of sorts with China’s president Xi Jinping while his critiques of Fed policy fall on ears that are hard of hearing, if not completely deaf.
In fact, the analysts found that market-moving tweets are disproportionately impactful. Examining 4,000 non-retweeted tweets during market hours since mid-2108, they found only 146 that moved the market. The Volfefe index “strongly†outperformed the overall tweet countOpens a new window heading into periods of substantially elevated implied volatility.
The rolling one-month average of tweets per day has increased significantly in recent weeks while the number of retweets has grown. Similarly, the market impact has increased, with substantial moves (more than 0.5 basis points within five minutes) in yield on the 10-year Treasury note even as volatility spikes.
JPMorgan analysts found this most relevant for explaining shifts in the implied rate volatilityOpens a new window for two-year and five-year Treasuries.
The price of volatility
In its analysis of the 10,000 or so tweets published since Trump took office, JPMorgan also figures out what times are favored for comments (between 12 and 2 p.m.), when the president apparently sleeps because there are no tweets (between 5 and 10 a.m.), and how his followers have grown less interested in his market-moving tweets, reflected in declining retweet rates.
You may well ask: What good is any of this? Twitter critics have been quick to claim the index has simply given the “grifter-in-chief†a way to manipulate the market.
But for sophisticated investors, the index is helpful because it shows that volatility in swaptions — options to swap interest rates that are used to manage risk — is increasing, making them more expensiveOpens a new window . Even if JPMorgan has not been able to tie each suspect tweet to a market movement, the market is clearly becoming more volatile.
The very concept is a play on the CBOE Volatility Index, known widely by its ticker symbol, VIX, and also nicknamed ‘the fear index’ because heightened volatility is considered a measure of how worried investors are. The index is derived from the volatility implied in options trading on the S&P 500 stock index.
It’s not without its critics but many investors attribute reliable predictive powers to it. (The VIX also inspired The Fear Index, a 2011 novel by English author Robert Harris.)
After a long dormant period, the VIX has experienced a resurgence recentlyOpens a new window , making stock pickers more in demand as investors can no longer count on a market moving in lockstep.
Limited predictive value
However, the principle of the VIX is that it looks ahead. The Volfefe Index, whether intended for fun or for analysis, has limited predictive value because its principle input, Trump’s tweets, are wholly unpredictable. It may be helpful, but only for professional investors attuned to the market’s every move.
The recent increase in presidential tweet volume may not last. JPMorgan found that 30 of the 146 market-moving tweets were false positives — the subsequent shifts in rates were unrelated to the tweet. It’s a fair bet that Trump and Xi will find their way to a resolution of the trade conflict ahead of the US presidential election in 2020 to boost Trump’s chances of reelection.
In the meantime, the Volfefe index remains a tool of limited use for market professionals but a great PR stunt for JPMorgan to ride the popularity of Trump’s tweets with his 64 million followers.