Stocks and top brass
US presidential approval ratings can be linked with market activity, writes Chris Davis
WITH SO MUCH financial data available for forecasting and evaluating the state of the economy, not many analysts would think to look closely at the approval ratings of United States presidents as an accurate indicator of how markets are likely to perform.
However, this is one of the things British-based Guy Monson, chief investment officer at Sarasin Chiswell, examines closely when trying to understand or predict the anomalies that affect certain financial indices.
'There is plenty of evidence to suggest that US presidential approval ratings can be linked with market activity,' said Mr Monson, who regularly appears on television for Bloomberg, BBC and CNN.
Looking at figures dating back to 1959 and comparing them with the weekly performance of the Dow Jones Industrial Average, Mr Monson discovered that stocks did better when presidents were doing poorly, and vice versa.
For example, in weeks when a president's approval rating was below 50 per cent, stocks rose at an annualised rate of 9.2 per cent. When it was between 50 and 65 per cent, the Dow rose at an annualised rate of 5.4 per cent. But when a president scored above 65 per cent - a fifth of the time - the Dow only rose 2.6 per cent on a corresponding basis.
'Data suggests that the US financial markets prefer a president to be healthy and unpopular, rather than very popular, which is when they expect negative activity,' Mr Monson said.
'Of course, if a president is appallingly unpopular, the markets fall because they expect a looming crisis. In the middle of last August, when President Bush moved out of absolute crisis rating to above 35 per cent, the market immediately rallied.
'Overall, it seems US financial markets prefer a Democrat president to a Republican, seen in the fact that key indices then tend to rise twice as fast. Best of all, though, is to have the presidency and congress controlled by different parties.
'The favoured configuration is a Democrat president and Republican congress,' Mr Monson said. Worst by far, according to the data, was to have the Republicans controlling both the presidency and congress, he added.
Looking at what might happen in global markets this year, he forecast average economic growth to continue at about 5 per cent - the fastest for a generation.
'Corporate profits as a percentage of GDP are at a 50-year high. We have simply never lived through a period where companies have been so profitable and spun off so much cash.' For 11 consecutive quarters, analysts had been underestimating corporate earnings.
In Asia, the story is about sound fundamentals and growth. This has led to an emphasis on combining traditional equity investments, real estate and some newer types of asset such as index-linked tools, which can produce a steady income stream. However, there is still a degree of caution about some non income-producing 'alternative' investments.
'Investors who allocate regionally should be aware of the vulnerable characteristics of British and US stocks tied to consumer products and housing,' Mr Monson said. 'My preferred approach, though, is to look beyond national boundaries.'
He pointed out that blue chips now sourced, sold, competed and raised capital globally, so decisions about where to locate their headquarters or list their shares were unlikely to be the main driver of success.
'Rather, characteristics exist within companies that transcend countries or sectors and provide an opportunity to differentiate themselves,' he said.
Mr Monson's own pioneering process of looking for themes in equity investment seeks to identify these cross-border influences. The aim is to identify companies on the world stage that have superior business models and cash flow, as well as pricing power, strong research and development, and a clear focus on delivering attractive returns for shareholders.
He continues to back blue-chip equities, despite worries about market instability.
'Global equities are still reasonably valued in their own right, but remain exceptionally attractive compared with almost any other asset class,' he said.
'Bond yields or interest rates would need to rise a long way before they seriously undermine equity prices.'
Even so, many investors are now using structured products to protect against downside risk.
He said a slowdown in US house prices and consumer spending could cause interest rates and bond yields to fall, but also add fuel to the boom in emerging markets.
He said that, unlike previous economic cycles where the rest of the world caught a cold whenever the US sneezed, other regions could now continue to accelerate.
'I think the global equity bull market has some way to go and countries with the largest markets are probably only halfway through it,' he said.