As financial conditions have tightened materially since the start of the year and pressure is mounting on the U.S. equity market, it is worth circling back to see how the “wisdom of the crowd” has held up. Specifically, does a sentiment indicator derived from Tweets on Twitter hold as an informative investable factor? It’s been over eight months since we launched the S&P 500® Twitter Sentiment Index Series in November 2021. Since market conditions changed significantly following the launch, let’s take a look at how the indices have been performing.
Previously, using back-tested results, data showed the sentiment factor helped provide better annualized performance when markets turned down compared to the indices’ underlying benchmarks: the S&P 500 and S&P 500 Equal Weight Index.
When reviewing the performance data for the first two quarters of 2022, we see that U.S. equity markets have experienced a significant downturn, with the S&P 500 dropping 19.96% and the S&P 500 Equal Weight Index dropping 16.68%. During the same period, we have seen that Sentiment acted as a cushion, with the S&P 500 Twitter Sentiment Index dropping only 18.78% and the S&P 500 Twitter Sentiment Select Equal Weight Index dropping only 14.94%—ultimately offering some downside protection relative to their benchmarks.
Even though both indices showcased this outperformance, we saw it more readily in the S&P 500 Twitter Sentiment Select Equal Weight Index, which outperformed its benchmark by 174 bps over the first half of 2022. This index is more sentiment concentrated—it reflects the 50 most positively talked about companies on Twitter from the S&P 500 and is equal weighted, versus a market cap weighting of 200 stocks in the S&P 500 Twitter Sentiment Index.
Essentially what the indices have demonstrated is that in a downturn, the wisdom of the crowd seems to have held.
Since January 2021, the conversation about stocks and indices on Twitter has grown by 52% and the number of users Tweeting about stocks and indices on Twitter has increased by 30%.1
“The finance community on Twitter continues to grow, featuring robust real-time discussion among a wide range of professional and individual investors. The S&P 500 Twitter Sentiment Index helps quantify the value of those conversations and gives people on Twitter an exciting way to measure the impact of their Tweets about publicly traded companies,” said Jared Podnos, Head of Strategic Market Development for Twitter’s Developer Platform.
An increased Tweet and user volume as a base for our indices, combined with a challenging two quarters for the U.S. equity market, provided a good test period for the S&P 500 Twitter Sentiment Indices, and they have managed to come out on top.
1 Source: Twitter Internal Data. Stocks and Indices Conversation Dec. 31, 2021-June 23, 2022. Global. PT, ES, DE, JA, TR, EN, HI, AR language only.
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