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Low Presidential Approval Ratings? Your Portfolio Approves.

Low Presidential Approval Ratings? Your Portfolio Approves.

| September 01, 2017

America has become much more polarized in the world of politics, as opposing parties don’t seem to agree on many things and compromise has become rare. However, it can be a mistake to mix politics and investment management. Favorable equity returns have been experienced under both Democrat and Republican presidential administrations. Additionally, bear markets and recessions have occurred while both parties have been in the White House. Taking a partisan approach to portfolio management would have resulted in missing out on the huge bull market during the Obama Administration. The S&P 500 gained 216% during the eight years under President Obama. Moreover, equity returns have been strong since President Trump was elected last November. The S&P 500 is up over 17% since the day after the election. Bringing politics into the equation when making portfolio decisions is ill-advised.

What happens when a president is viewed unfavorably? Nearly every presidential administration has gone through periods of low approval ratings. With the country split along party lines, the approval rating for whomever is in office could be relatively low. The approval rating for President Trump is currently 36%, according to the latest Gallup Poll. Since 1959, the sweet spot for U.S. equity returns has been a presidential approval rating between 35% and 50%. Barack Obama’s ratings fell largely within this range during his presidency, as has President Trump’s in his first eight months in office. According to Ned Davis Research, since 1959, whenever a president’s approval rating was between 35% and 50%, the Dow Jones Industrial Average has returned 11.1% on an annualized basis. Those returns are actually higher than periods of high presidential approval. The Dow Jones Industrial Average has returned 7.2% annualized when the presidential approval rating is between 50% and 65%, and 2.4% annualized when presidential approval rating is above 65%. However, a low presidential approval rating has been historically good for equity returns only up to a point. When the presidential approval rating drops below 35%, it becomes “so bad, it’s bad.” Keep in mind that this could be cause and effect. A falling equity market could lead to a poor presidential approval rating. The annualized return for the Dow Jones Industrial Average is -13.8% when the presidential approval rating falls below 35%. This is a relatively rare occurrence, though, as the presidential approval rating has fallen below 35% only 7.4% of the time since 1959. Instances of when the presidential approval rating dropped below 35% include the Watergate scandal under President Nixon, rampant inflation under President Carter, and the financial crisis during the later stages of President George W. Bush’s time in office. Also, 35% isn’t necessarily a magic number; and President Trump’s approval ratings could fall below this and equity markets may not fall. The performance numbers cited above are averages. It is difficult to project where President Trump’s approval rating goes from here, but up to this point, it has been “so bad, it’s good.” At least from the perspective of your portfolio.
This report is created by Cetera Investment Management LLC

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