Indexica, a leader in the NLP alternative data space, announced that their predictive indexing intelligence engine has been able to find leading signals in news patterns related to Trump. While it’s clear that Trump’s tweets and actions move markets within seconds, what hasn’t been clear until now is whether the broader conversation stemming from him and his actions moves markets systematically. Trump tends to impact markets in four notable ways, each with identifying predictive patterns:
He Drives Volatility. BuzzSentiment, an Indexica metric that measures the ratio of news that is related to Trump rather than other topics, combined with Attitude, is predictive of a significant portion of market volatility. Neither Attitude nor Volume alone exhibited predictive power. But when Trump is written about more often and in a more negative tone, equities tend to become more volatile. Some may argue that the BuzzSentiment of Trump is highly volatile because the person the metric is measuring is highly volatile, and markets follow. The metric is short-term, and markets tend to calm down as the metric reverts towards its moving average.
He Generally Drives Equities Higher. When Anger, an Indexica metric, associated with Trump increases, the market tends to follow by increasing. This counterintuitive result may imply that most anger associated with Trump is uncorrelated to corporate performance. Additionally, as Action Share related to Trump, which quantities the degree to which news language about Trump is tilted towards verbs (actual action) versus adjectives (lots of talk), the market tends to increase. Trade war and immigration action are exceptions.
He Polarizes the Market. Certain Trump actions and news patterns cause bifurcation among equities, currencies, and commodities. For example, companies highly connected to conversation around a trade war, as measured using Indexica’s Connectivity metric, which is used for thematic/exposure scoring, underperform those that are less connected. Connectivity finds similar results across currencies and commodities from countries highly connected to trade war talk. Given that Trump polarizes the population, it is unsurprising that he polarizes markets. But what is surprising is the degree to which the Connectivity metric is predictive of market performance. Trump tends to ratchet-up his rhetoric into quantifiable peaks, and by identifying early levels of a predictable Trump tonality trend, predictive signals can be gleaned.
Nothing He Does Persists. Factor investing values broad, historically persistent drivers of return. Many of Indexica’s factors exhibit this type of pattern, including Futurity, Severity, and Opportunity, which each measure trends using linguistic techniques. For example, companies in the top decile as measured by Futurity, outperform those in the lowest decile by a multiple of three over long periods of time. But no factor related to Trump is persistent. The ways in which he drives market returns are short-term, chaotic, and ever-changing. What Indexica has been able to quantify are momentum-centric drivers. Next month, Indexica is likely to find new ways in which Trump is moving markets and the world.
Zak Selbert, CEO at Indexica added, “Indexica’s job is to agnostically identify and measure what drives markets. Though Trump might disagree, news articles narrate what’s happening in the world and are an ideal source for quantifying events, trends, and opinions. Indexica humbly attempts to find predictive signals in unstructured textual data that foreshadow market movements.”