Why Biden’s popularity could stop stock market bulls in their tracks

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Could 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 interpreted correctly, a president’s approval rating is a good counter 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 table. Note that, except 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 DJIA, + 0.19%.

Currently, according to Gallup, the public approval rating for Joe Biden’s transition is 65%. That’s the approval territory in which the Dow has historically produced a return well below the 2.4% annualized average. Gallup will not calculate a formal presidential approval rating until Biden takes office on January 20. In the meantime, getting your transition approved is the best we can do. 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 took office in 2017, and for the next four years it has ranged from a low of 35% to a high of 49%. I don’t need to remind you that the stock market performed well above average during the four years of Trump’s presidency. Since opening day in 2017, the S&P 500 SPX, + 0.04% adjusted for dividends has produced an annualized return of 16.0%. It’s not just Monday morning’s quarterback for me to point out that Trump’s low approval rating bodes well for stocks. I dedicated a column to this topic four years ago, with the headline: “Why Trump’s Widespread Unpopularity Could Be Good for Stocks.” Why would presidential approval have the opposite impact on the stock market? We can only speculate, but at least part of the answer certainly is that when approval ratings are lower, the stock market is less vulnerable to disappointment. Soaring approval ratings, by contrast, are associated with unrealistic expectations about what the president can accomplish. And given the intense polarity in the US right now, it certainly seems plausible that Biden is having a hard time advancing his ambitious agenda. There is also a non-political reason for the disappointment, given that the stakes are high to end the pandemic, an outcome that is by no means assured in 2021. Why would very low approval ratings not fit this contrary narrative? Ned Davis in the past has referred to periods as beyond “excessive pessimism”, calling them instead “so bad it’s bad.” One example is the run-up to Richard Nixon’s resignation from the presidency in 1974. His approval rating dropped to 24%, and that was a terrible time for the stock market. Other recent presidents whose approval ratings fell below 35% during their terms include Jimmy Carter and both Bushes. Mark Hulbert is a regular contributor to MarketWatch. Your Hulbert Ratings tracks investment bulletins that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com More: ‘Incoming Biden Administration Will Face A Growing, Not Waning Crisis’ Plus: Why Men Are More Likely To Invest In Tesla