Six-month returns are at their lowest when presidential approval is at an extreme
President Trump’s approval rating keeps falling. According to Gallup, as of last weekend, 34% of Americans approved of Trump's performance in office, which is the lowest reading of his presidency and since George W. Bush left office in 2009 (Barack Obama's lowest reading was 37%). Is this at all relevant for the stock market? Could it work as a contrarian sentiment indicator with bullish implications? Below, we will look to see if ultra-low presidential approval ratings have generally led to good or bad stock returns.
Stocks and Presidential Ratings
Below is a chart of President Trump’s approval rating. Despite the market’s upward drift, as shown by the S&P 500 Index (SPX) in blue below, Trump's rating keeps falling.
The chart below shows the same the poll during President Obama’s administration. The market rose steadily throughout those eight years. His approval rating, however, suffered downtrends. Specifically, Obama's rating fell from mid-2009 through late 2011, and then again throughout 2013. There doesn’t seem to be a lot of correlation between presidential approval ratings and the stock market. Evidently investors don’t make up a lot of those polled.
SPX and Gallup
Now, let's see how the S&P performs over the next six months, depending on Gallup’s presidential approval ratings. To do this, I went back to 1950 and found the Gallup poll reading as of the Friday of each week. I then summarized the S&P 500 returns over the next six months, depending on whether that approval rating was in the 20’s, 30’s, 40’s, etc.
The current reading for President Trump is 34%, placing him in the second-to-worst bracket below. As you can see, the two instances where the average return is negative is when the presidential approval rating is at either an extreme low or an extreme high. The healthiest returns are those middle three columns.
There is another observation that doesn't bode well for extreme approval ratings. As you can see below, the average negative is largest when the approval rating is at its lowest, and second-largest when approval is at its highest. While President Trump's current rating is not yet in that lower bracket, it has been trending lower. If I’m using President Trump's sinking approval ratings as a market indicator, then the data below would cause some uneasiness.
