By Mark Hulbert
Might Joe Biden’s high approval rating be too high? The answer from an investment perspective appears to be “yes.” Ned Davis Research has found that, when properly interpreted, a president’s approval rating is a good contrarian indicator. That means the stock market tends to underperform when that rating is particularly high.
The findings of the Ned Davis Research analysis are summarized in the accompanying chart. Notice that, except for when the presidential approval rating is particularly low (below 35%), there is an inverse relationship between it and the return of the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.48% .
Currently, according to Gallup, public approval rating of Joe Biden’s transition stands at 65% . That’s approval territory in which the Dow historically has produced a well-below-average return of 2.4% annualized.
Gallup won’t calculate a formal Presidential approval rating until Biden is inaugurated on Jan. 20. Meantime, the approval of his transition is the best we can go on. The comparable approval rating for Trump’s transition four years ago was 48%.
The sweet spot for the stock market appears to be when the presidential approval rating is between 35% and 50%. That’s where Trump’s rating has been throughout his presidency: It was 45% the week he was inaugurated in 2017, and over the subsequent four years has ranged between a low of 35% and a high of 49%.
I need not remind you that the stock market produced a well-above-average return over the four years of Trump’s presidency. Since inauguration day in 2017, the dividend-adjusted S&P 500 /zigman2/quotes/210599714/realtime SPX +0.36% has produced a 16.0% annualized return.
It’s not just Monday-morning quarterbacking for me to point out that Trump’s low approval rating boded well for stocks. I devoted a column to this subject four years ago, with the headline: “ Why Trump’s widespread unpopularity might be good for stocks .”
Why would presidential approval have a contrarian impact on the stock market? We can only speculate, but at least part of the answer no doubt is that when approval ratings are lower the stock market is less vulnerable to being disappointed.
Sky-high approval ratings, in contrast, are associated with unrealistic expectations about what the president can accomplish. And given the intense polarity in the U.S. right now, it certainly seems plausible that Biden will have difficulty advancing his ambitious agenda. There is a non-political reason for disappointment as well, given that so much is riding on ending the pandemic — an outcome that is by no means assured in 2021.
Why would very low approval ratings not fit into this contrarian narrative? Ned Davis in the past has referred to such periods as beyond “excessive pessimism,” calling them instead “so bad it’s bad.” An example is the period leading up to Richard Nixon’s resignation from the presidency in 1974. His approval rating got as low as 24%, and that indeed was a terrible time for the stock market.
Other recent presidents whose approval ratings dropped below 35% during their terms include Jimmy Carter and both Bushes.