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Trump uncertainty can be good for stocks, study says

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S.
Michael Nagle | Bloomberg | Getty Images
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S.

Trade, immigration, late-night tweets.

To some, markets seem to have irrationally ignored a host of worrisome uncertainties around the Trump administration. But it's precisely that anxiety surrounding a market at all-time highs that keeps others thinking stocks can run higher.

Analysis from Ned Davis Research found that a low presidential approval rating corresponds with stock market gains.

"It turns out, at least historically, that a divided country has been relatively bullish for stocks, perhaps keeping optimism from becoming too extreme," Ned Davis, senior investment strategist at his namesake firm, wrote in a Feb. 1 note.

S&P 500 and Gallup Poll presidential approval rating since 1959

Source: Ned Davis Research

President Donald Trump has an approval rating of 45 percent, according to the Feb. 3 Gallup Poll. When that rating is between 35 and 50 percent, Davis' research found the S&P 500's gain for the year is 12.4 percent.

The index climbs 8.2 percent annually when the rating is between 50 and 65 percent, and just 1.4 percent when the approval rating tops 65 percent, according to the analysis.

"If everyone was bullish now on the president and the sentiment of the country, I'd be bearish as heck" on the market, said Bruce Bittles, chief investment strategist at Baird.

"I think there are a lot of good things that are happening on a macro level that folks who are looking at this through a micro level are missing," he said.

To be sure, presidential approval ratings fluctuate and any correlation with the stock market should be seen more as a reading on sentiment. The annual stock index gains in Davis' study only occurred slightly more than a third of the time.

And if disapproval levels drop below 35 percent, the study found stocks tend to post double-digit declines on the year.

The S&P 500 has jumped about 8 percent since the election and was trading at record highs for a second straight day Friday. Much of the run higher comes on bets for increased growth as the Trump administration has promised tax cuts, deregulation and infrastructure spending.

However, some strategists worry that those policies will take longer than expected to implement, and that other proposals such as the border adjusted tax and renegotiation of trade proposals will hit growth negatively.

Other investors have been on edge simply due to the president's vitriolic Twitter attacks on companies and individuals.

"There certainly will be pullbacks," said Quincy Krosby, market strategist at Prudential Financial. "Something will hit the headlines, something will hit the tape, and then you'll see whether investors embrace the secular story of the Trump pro-growth, pro-business strategy."