News Sentiment on Trump Does Not Matter for Markets, Oh…Really?

On our previous insight, Trump losing ‘perception battle’ on Corona and why it matters? we received a number of responses. In this note, we had written that how sentiment from news flow on US President, Donald Trump had quickly worsened and why that may be important for the direction of markets. The perception that Trump has handled the ‘Corona crisis’ poorly has been fairly strong in media and our argument was that this could hurt the markets.

The feedback we got was that this is not correct and there is absolutely no link between ‘Trump’ and ‘US markets’. On the contrary, while Trump may be doing badly on news flow sentiment, the markets have been doing rather well. After the market bottom on 23rd March, S&P 500 has gained 25% and while during this time, a) the Corona crisis has worsened significantly in US, b) the common perception is that handling of this major health and economic challenge by US President has not been optimal. How do we explain that and why do we say that Trump matters for market?

Fig. 1: S&P 500 over last one month (Source: Google)

Yes, there is a dichotomy here. When you look at the chart above, there is no sign that market is really bothered about Trump. The news sentiment may be bad on Trump but that has not stopped markets from staging a very quick smart recovery. So, can we conclude that markets and Trump will go their separate ways. But there are reasons why that may not be the right way to look at this. First is that the market is not responding to Trump, it is responding to what Fed had done and how ‘Risk On’ trade has come back to flavour because of Fed’s proactive stance.

The second is that perhaps it is possible that market had priced in the Corona crisis, more than to the extent it was needed. While the numbers on Corona continued to deteriorate, the market had already fallen more than what was warranted and hence started to recover. The third is that since the market is still more than 15% below its February peak, the impact of Corona has not been ignored by the markets despite Fed injecting so much of liquidity and buying all kinds of risky assets. However, none of this means that markets can continue to ignore the sentiment on Trump over medium to long term.

Once the emergency response has been provided by Fed, the economy will still require a careful steering and proactive, consistent response from the administration. Even in the best-case scenario, this will be needed for at least a couple of quarters. There is no doubt that White House will have to play a role in this and a positive contribution from Trump will be important. The second is that still Wall Street will be eagerly waiting for US presidential election results. That has always been a major curiosity factor for US Capital Markets and this time will also not be different.

In summary, Fed has saved the markets in near term but the divergence between news sentiment on Trump and market direction is not sustainable. Sooner or later, there has to be a link between these two. Of course, we can’t time it when this will be visible. But we will not bet against this to last for very long, for sure.

Research Team
EM Alpha LLC

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About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious.Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

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