Stocks in 2012: Is Obama's Poor Approval Rating a Good Thing?

Bleh, finally 2011 is behind us... but will 2012 be any better?  There is certainly enough going on to make it exciting: the US has presidential elections; the European Monetary Union is on the brink; China is playing rig-an-economy; and lest we forget... the end of the Mayan calendar!

The Daily Stag Hunt Staff considered publising its predictions and non-predictions for 2012, but as the fate of global markets consolidates into a single binary (take a guess), it seems a fruitless exercise.  As is well publicized but perhaps still underestimated, the EU has to potential to break everything.  

Nevertheless, the Staff did find some things of interest in our research on stocks for 2012...

2011 was an ugly year for equities. London's FTSE finished -5.5%; Germany's DAX, -15%; France, -26%, Spain, -15%; Greece, -61%, Japan, -17%; Australia, -16.5%; China, -22%; etc, etc.  The only index that finished higher was the Dow Jones (+6%).  

What is interesting is that going into 2011, the so-called equity strategists were generally bullish.  Take for example the January 2011 USA Today Roundtable.  The consensus among the "Five Wall Street Heavyweights"?

The major theme from USA TODAY's 15th annual Investment Roundtable is that the bond market is looking riskier amid signs the economy is gaining traction. The five panelists say stocks, which get a boost from stronger growth, will post better returns than bonds in 2011. They are advising investors, many still leery two years after the financial crisis, to start shifting some investment dollars out of bonds and back into stocks.

Oops! It was bonds not stocks that turned out to be the lucrative bet.  30-year treasuries returned 35% in 2011! 10-year bonds, an enviable 17%. 

So what are these same equity strategists thinking for 2012? It's nearly reversed.  Here's the theme from USA Today's same roundtable forecasting 2012 which says it all:

The outlook for U.S. stocks next year is not wildly bullish.

We're not prepared to call these experts "reverse indicators," but they may well reflect the markets' general expectation for equities this year.  And if caution is the now the trend keeping money on the sidelines, is the surprise move for US equities up

Actually, there is data to suggest that a healthy finish for US equity indices would not be a surprise at all.

The Staff dug back into time on equity performance in election years and it's impressive. 

Of particular interest are those election years where the incumbent president heading into the final year of his term has an approval rating below 50%.  It's occured 8 times since 1940 and in 7 of them equities moved higher.  And in those years, equities averaged a tantazlizing 12.5% return.  The lone exception, of course, being President Bush in 2008.  

Clearly, markets cannot rule out another 2008-like event.  Nevertheless, President Obama's approval rating heading into 2012 stands at 42%.

And as we've highlighted before, there are measures he can take to boost the economy and avoid having to deal with the uncooperative Republicans.  Read: here, here, and here

Year President Approval Rating Entering the Final Year of Term Dow Jones Index Close at End of Year
1952 Harry Truman 25% 8.4%
1968 Lyndon B. Johnson 45% 4.3%
1976 Gerald Ford 43% 17.9%
1980 Jimmy Carter 42% 14.9%
1988 Ronald Regan 49% 11.8%
1992 George H. Bush 48% 4.2%
1996 Bill Clinton 42% 26.0%
2008 George W Bush 38% -33.8%
2012 Barack Obama 42% ?
    Average return of all years 6.7%
    Average return of all years except 2008 12.5%
Table Created by: Stag Staff                                                        Data Source: Dow Jones, Gallup, Wikipedia