Why Trump’s widespread unpopularity might be good for stocks By Mark Hulbert
* December 13, 2016
The Dow Jones Industrial Average typically does better when presidents become less popular
CHAPEL HILL, N.C. — Might the stock market be soaring because Donald Trump’s unfavorability ratings are so high?
Believe it or not, yes.
Lower presidential approval ratings historically have been associated with higher stock-market returns. It therefore would actually be a source of investor concern if Donald Trump’s favorability rating were a lot higher than it is right now.
The accompanying chart summarizes the relevant data, courtesy of Ned Davis Research. Notice that the stock market historically has performed the best when the president’s approval rating according to the Gallup organization is between 35% and 50%. That’s comparable to the situation today, since Trump’s favorability rating is 47.4%, according to a compilation of 359 polls from 39 pollsters conducted by Huffington Post.
To be sure, favorability is not the same thing as approval, but Mr. Trump won’t have a presidential approval rating until he takes office in January.
Contrast today’s situation with what prevailed when Barack Obama took office eight years ago. He at that time was far more popular than Trump is today, and his approval rating after taking office was around 70%. Over the first seven weeks of his presidency, the Dow Jones Industrial Average DJIA, +0.20% plunged 18%, and the S&P 500 SPX, -0.11% skidded 16%.
Of course, those seven weeks were among the bleakest of the financial crisis, and the stock market’s plunge was caused by many factors besides Obama’s approval. But note carefully that it’s not just Monday-morning quarterbacking for me to point out that his high approval rating boded poorly for stocks: I devoted a column to this very subject soon after Obama took office, arguing that Obama was too popular for the stock market’s good.
You shouldn’t be surprised by this inverse relationship between presidential approval and the stock market, since it’s just what contrarian analysis would suggest. Sky-high approval ratings are associated with unrealistic expectations about what the president can accomplish.
As you can see from the chart, however, the correlation between presidential popularity and the stock market is not perfectly inverse. The stock market actually performs very poorly when presidential approval ratings get low enough.
Ned Davis has referred to such periods as beyond “excessive pessimism,” calling them instead “so bad it’s bad.” Examples of such periods include the last months of Nixon’s presidency, just before he was impeached, much of the latter half of Jimmy Carter’s term, and the last year or so of George W. Bush’s presidency.
Fortunately, Trump’s current favorability rating is nowhere near as low as to qualify as a period that in the past was associated with a terrible stock market. Watch out below if his popularity does fall to those levels.
Meanwhile, his low favorability rating can be considered part of the Wall of Worry that stock markets like to climb.
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