In this politically charged era, it would not be prudent for investors to ignore who lives in the White House when developing portfolio strategies. I have found this to be true probably starting back in 2000 but has become most profound over the last 5 years. Investors from both parties get very nervous when their party doesn’t win the presidency. But just because your pick didn’t win, doesn’t mean your investments are going to suffer.
In fact, there is some interesting data that shows how stocks perform in relation to presidential approval ratings. The numbers show that there is an inverse relationship between stock prices and approval ratings. Historically, the stock market has performed the best when presidential approval ratings are below 50%.
Mark Hulbert wrote a great article for MarketWatch that does a great job explaining this relationship. Here is a chart from that article that shows the relationship between ratings and stock prices:
As you can see, the market has performed best when the sitting President approval rating is between 35% and 50%. Also, the relationship is not perfectly inverse. When ratings get really bad, below 35%, the markets tank. Currently, Biden’s approval rating has dipped below 50%. This bodes well for the stock market, historically speaking.
The most popular explanation for this contrarian indicator is that the stock market likes gridlock in D.C. So, when a president is unpopular, the government probably won’t be able to get much done with regards to major policy changes. No change means no uncertainty for the stock market which is always a good thing for stock prices.
Having said all of that, I’m still a firm believer that if you have more than five years until you need money from your investments, it is irrelevant who the President is today.
Please let me know if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
