As we were going through our weekend reading, the cover of the Economist jumped out at us. For those of you who didn’t get a chance to read the Economist, the cover had a picture of President Obama with the title, “Crunch time”. We typically consider the covers of most major financial publications as contrary indicators, or at least derivatives of such. This cover actually seems to be an apt description of the President’s current predicament.
As the Economist notes:
“If the opinion polls are to be believed, Barack Obama is now, six months into his presidency, no more popular than George Bush or Richard Nixon were at the same stage in theirs. His ratings are sagging particularly badly with electorally vital independent voters: two-thirds of them think he wants to spend too much of their money.”
We have previewed this shift of the middle moving away from President Obama, and it now seems to be occurring in a substantial way. We have inserted a chart below of the Rasmussen Daily Presidential Tracking Index (difference between strongly approve and strongly disapprove), which shows the inverse relationship between President Obama’s approval rating and the stock market. The internals of the Rasmussen highlight a number of key points in regards to President Obama:
- Only 11% of voters believe taxes will go down under President Obama;
- Only 29% of voters trust President Obama on the economic crisis; and
- Almost 76% of voters believe President Obama is too liberal.
Rightly or wrongly, President Obama is very vigorously being categorized as a leftist President who will raise taxes and can’t handle the economy. These characteristics are what seem to be directing Obama’s weak polling numbers as of late. Two additional polls from Rasmussen offer evidence as to why this is the case:
- 30% of voters believe that increases in government spending will help the economy and 50% believe that it will hurt the economy; and
- 54% of voters believe tax cuts will help the economy and 19% believe they will hurt the economy.
Unfortunately, for his approval rating, President Obama is doing the one thing that voters broadly disapprove of, which is he is increasing government spending. The implication of this increase in government spending is that taxes will likely have to go up. According to Associated Press reports over the weekend:
“Treasury Secretary Timothy Geithner and National Economic Council Director Larry Summers both sidestepped questions on Obama's intentions about taxes. Geithner said the White House was not ready to rule out a tax hike to lower the federal deficit; Summers said Obama's proposed health care overhaul needs funding from somewhere.”
It doesn’t take a group of knucklehead hockey players from Yale to figure out the obvious here, taxes are going higher, which is what President Obama’s approval rating is starting to discount.
Perversely, the benefit of a declining Presidential approval rating is that it is positive for the stock market. Ned Davis Research has done extensive work on this idea, and we conceptualize it in the chart below, but “in weeks when the presidential approval rating sagged below 50 percent, stocks rose at an annual rate of 9 percent -- versus only 2 ½ percent when the president in office sported a wildly popular 65 percent approval rating in the polls.” No surprise, that when a President’s approvals declines too far, typically below 38%, stocks tend to fall on average 2% annually. This is not unlike our thesis on the dollar, which is that a weak US$ is positive for the stock market, to a point.
President Obama’s Chief of Staff Rahm Emmanuel famously said, “Never let a serious crisis go to waste.” For investors, the rule may be more aptly characterized: never let a serious crisis in Presidential approval go to waste.
Daryl G. Jones