Presidential Approval Down, Stock Market Up

On February 17th, 2009, we wrote the following in a note entitled, “Eye on Sentiment: Rasmussen Total Approval Index”, the following:

“The decline in the Presidential Approval Index is about the best leading indicator we can find for President Obama’s approval rating. It shows the broad shift of approval for President Obama as voters downshift from Strongly Approve to Approve and from Disapprove to Strongly Disapprove. To the extent that it matters, it is very likely that President Obama’s broad approval rating heads into the mid-50s in the coming months, if not lower, as these internals are showing a very negative trend.”

While we can’t make money on calling Presidential approval ratings (at least not directly), President Obama’s approval rating is now solidly in the mid-50s as we forecasted a month ago. Additionally, in this Sunday’s Rasmussen Report, the Presidential Approval Index (difference between Strongly Approve versus Strongly Disapprove) registered +6, which coincides with an all time high in Strongly Disapprove of 31% and an all time low in Strongly Approve of 37%. So even though the total approval rating hasn’t broken to new lows (it was at 56% Sunday and first hit 56% about 8 days ago), the internals continue to deteriorate, which directionally suggests that a new low in total approval will be set in the next month or so.

As we have written in the past, President Obama entered office as an extremely popular President and so it is not totally surprising that his approval ratings have come back down to earth, especially in light of the controversy over the stimulus package and the missteps as they relate to his appointments. If we break his numbers down even further, President Obama is, not surprisingly, most weak with his two weakest constituencies. Specifically:

• While 37% of both men and women Strongly Approve of the President’s performance, 36% of men Strongly Disapprove and only 27% of women do; and

• Along party lines, 66% of Democrats Strongly Approve and 54% Strongly Disapprove.
Interestingly, on March 5th the Rasmussen poll indicated that 72% of Democrats Strongly Approve of the President, so the largest shift in the last two weeks for President Obama has actually come from within his own party. This shift of Democratic approval, as our Healthcare Sector Head Tom Tobin noted, also coincides with President Obama striking a more business and market friendly tone in the past couple of weeks.

Absent an external event, like 9/11, which shot President Bush’s approval rating to record levels, it seems likely that President Obama’s ratings will continue to deteriorate. And from an investment perspective, this might just be a good thing. The market sold off after Obama was elected, after he was inaugurated, and after his major speech to Congress, and now is rallying despite his new lows in approval.

Admittedly, we misjudged Obama’s impact on the stock market. Rightfully, we compared President Obama to FDR in terms of entering office with very high approval, entering office during time of serious economic duress, and taking over from an extremely unpopular administration. In reality, while both Presidents did share these characteristics, the reaction of the stock market to both Presidents has been markedly different. In FDR’s first 100 days, the stock market was up ~50%. Conversely, so far the stock market is down ~5.5% since Obama’s inauguration.

Ironically, while declining Presidential approval might be negative for broad confidence, historically it has a very strong correlation for inverse movements in the stock market. In fact, Ned Davis Research did a study of data from 8/21/1959 to 3/31/2006 in which they looked at the weekly return in the stock market when the Gallup Presidential Approval Poll is above 65, between 50 and 65, and below 50. The results of the study are outlined in the table below:

The punch line is that in the weeks where the Presidential Approval rating is the lowest, the stock market performs the best, and with a sizeable margin at that. So while to some it may be counterintuitive, President Obama’s approval rating breaking lower in the coming weeks may actually be positive for the stock market.

Daryl G. Jones
Managing Director