Historically, there is no statistically significant relationship between stock prices and presidential approval ratings. In fact, Richard Brody shows in his classic study of public opinion, Assessing the President, that even macroeconomic performance is more often than not an inadequate predictor of public opinion.* However, for the Obama administration there has been an unusual inverse relationship between the economy and public approval.
From today to the inauguration, the correlation between the S&P 500 and total approval of the president is -0.794. This strong relationship is the result of one of the strongest equity rallies in history and the quick end of Obama's honeymoon period.
Another interesting correlation is that between the US Dollar and Obama's approval. The correlation since inauguration is a positive .822. There is mounting political pressure in the US for a stronger dollar (the GOP has started using the dollar's weakness to attack the President), even though a weak dollar is in many ways in Obama's interest. If the weak dollar policy ends up creating jobs, we will likely see the dollar-approval correlation turn negative.
Though the relationship between the dollar, stocks, and Obama's approval rating is statistically significant (a regression indicates stocks and the dollar have a 71.6% predictive power with p-values <.0001), there is no reason to think this is a causal relationship. (If anything, I'd think higher stocks are having a positive effect on Obama's approval rating because it indicates his policies are working. Apparently this doesn't seem obvious to everyone, such as Jim Cramer, who argued Obama's low approval rating are bringing up stock prices because investors believe a weaker Obama is better for business.)
However, once in a blue moon, these correlations are significant and explanatory. The stock market crash following the collapse of Lehman Brothers was one of the main reasons Obama was elected president (which says a lot about how the American public views Obama). Gallup charted opinion of Obama during fall 2008 versus negative views of the economy:
If you look at the chart above, you see Obama only took the lead after the collapse of Lehman Brothers on Sept. 15 when negativity surged. Also, Obama's lead spiked October 8, during the Dow's most dramatic decline of the crash:
The high negative correlation between stock prices and Obama's approval rating is likely a coincidence. But there are real implications to this correlation. As stocks go up, the severity of the financial crisis declines. As the intensity of crisis decreases, the harder it becomes to push through effective reform. During the Great Depression, it took five years of misery before Congress pushed through meaningful reforms. In a previous post, I discussed how, from the perspective of some markets, this crisis looks very similar to past crises (1987) that ended up with no material reform. In electing Obama, the electorate voted for change. Now that in retrospect the crisis seems less dangerous than it was, the need for change becomes less apparent. Obama won the election more narrowly than people remember. It took one of the most unstable economic moments in US history to grant Obama his narrow lead. We really shouldn't be surprised that the public responded dramatically to Obama's ambitious changes. The response to Healthcare reform would likely have been much different had markets not recovered so fast.
* On a side note, one of Brody's findings in Assessing the President is that approval of a Democratic president increases as unemployment grows and falls as unemployment shrinks. However, the relationship between inflation and a democratic president's approval rating is negative, meaning approval falls when inflation rises. For Republicans on the other hand, inflation is positively correlated with approval while unemployment is negatively correlated (as one would expect). This might reflect the different expectations voters have for democratic and republican presidents. Therefore, when a democrat curbs inflation, he is rewarded with higher approval than a republican might otherwise get, because it is unexpected.
