As growth gloom deepens, Twitter offers clues to earnings

Investors started last year full of optimism and ended it surrounded by doom and gloom. This year seems to have started in a bleak mood. So how likely is it that it will end on a positive note?

It all depends on how the world’s main economies behave. Despite President Trump’s tax cuts, US companies are reluctant to embark upon the capital spending that he was banking on to boost the economy and the stock market.

As it turns out, taking credit for the rally was not a wise move for President Trump; he must also take the blame for the market drop – and even if he doesn’t, some investors could blame his policies.

And they would not be entirely wrong. When it comes to investing, company managers care more about stability and economic growth, and less about fiscal incentives.

If anything, the tax cuts have spurred a flurry of distribution of capital to shareholders – nice for them, but also a sign that the management of these companies found nothing better to do with the windfall other than returning some capital to the shareholders.

Analysts at Bank of America Merrill Lynch expect capex to lose momentum in the next few quarters in the US; in Europe capital spending has already been faltering for a while.

In continental Europe, the slowdown was influenced by a rally in oil prices last year which hurt investment, since most European countries are importers of crude oil. In the UK, investment has fallen as uncertainty about Brexit has been on the rise.

The fund managers in BofA’s monthly survey have become more pessimistic about growth, too, and they recommend that companies focus on improving their balance sheets, whereas a year ago they thought companies should invest their cash.

What are investors to do? The Bull and Bear indicator recently triggered its contrarian “Buy” signal and it is up to 2.5 now, but other signals are not that clear.

Source: Bank of America Merrill Lynch

Besides the classical forecasting methods, alternative ways to gauge the future of a company’s returns are emerging, as technology and social media change the investing landscape.

One relatively recent trend is to follow what company CEOs post on social media and try to gauge from their mood what the companies’ outlook is likely to be. But this is not without its pitfalls, as Xing Gao, University of Illinois at Urbana-Champaign, showed in a paper for which she analysed 127,916 tweets from the personal accounts of 226 CEOs.

The results of her study showed that investors could perhaps predict positive abnormal returns in the firm’s future from the fact that the CEO’s tweets contain a high proportion of positive words – a pattern that is especially strong before earnings announcements.

However, she also found that CEOs include a high proportion of positive words in their tweets before option exercises and stock sales – a result that seems to suggest that CEOs use their accounts strategically, knowing that investors pay attention to them.

As ever, sentiment is everything in the markets, and it can turn unexpectedly. The fact that the year started in a gloomy mood does not mean that it has to stay this way. Watch those tweets.