The Tweeter-in-Chief is at it again.
A series of tweets from President -elect Trump over the last two days has reminded traders that 2017 will be a year unlike any other for political risk. Epitomizing the new era of 140-character foreign diplomacy, Trump took two nuclear powers to task on Monday:
These taunts and threats likely play well with Trump's supporters, but they're concerning for global investors, who value stability and certainty above all else. A continuation of this seemingly off-the-cuff approach to foreign policy could lead to tit-for-tat sanctions with trading partners and rising tensions with China, the US's 3rd-largest trading partner. From a purely academic perspective, the introduction of a new type of risk could force investors to demand a higher "risk premium" (read: lower prices) for holding risky assets like stocks, especially those exposed to hot-button countries like China.
Speaking of countries that have attracted the President-elect's ire, investors saw the other aspect of rising "Trump Tweet Risk" Monday morning. Mirroring his previous attacks on large multinational industrials like Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT), Trump trained his sights on General Motors' (NYSE:GM) operations in Mexico:
As of writing, GM is trading flat in early trade on Tuesday, lagging the broader market.
Not surprisingly, Trump's previous corporate targets have been eager to placate the incoming President, but it may only be a matter of time before a company opts to stand its ground and risk increasing scrutiny in the interests of defending its business operations. After all, Trump hasn't even taken the oath of office yet, so traders may have another 4-8 years of unpredictability.
Much like the broader foreign policy aspect of the "Trump Tweet Risk", the idiosyncratic risk of coming into the President-elect's crosshairs is borne primarily by large, multinational industrial companies. This makes sense given the Trump campaign's focus on bringing back blue-collar manufacturing jobs, but raises the question: which company will be the next to get blindsided? Ford (NYSE:F)? Raytheon (NYSE:RTN)? United Technologies (NYSE:UTX)? Only time will tell.
Moving forward, the specter of an unexpected 140-character presidential "attack" could push capital into smaller-cap and more domestically focused stocks at the margin. While other components of the new administration's domestic policy will certainly trump (no pun intended) this marginal risk, it's still something to keep in mind for traders deciding between two otherwise equal opportunities.