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Why Stocks Do Better When Congress Is Out of Session
by Dr. Mark Skousen, Advisory Panelist, Investment U
Friday, July 11, 2008: Issue #819
“No man’s life, liberty, or property [and the stock market] are safe when the legislature is in session.”
– Judge Gideon Tucker, 1866 New York Circuit Court
I’m here at my big show, FreedomFest in Las Vegas, where I discovered one of the most unusual investment strategies I’ve ever seen. One of the 88 speakers is Eric Singer, long-time Wall Streeter who has created a novel mutual fund that handily beats the market but is only invested about 30% of the year!
He’s discovered an incredible anomaly in the marketplace: Stocks do better when Congress is out of session, and do poorly (very poorly) when Congress is in session.
Eureka! Whether you’re a Republican or Democrat, this is a real eye-opener. We all hate to see our hard-earned taxpayer money wasted, or our business over-regulated. Now Mr. Singer has exposed the devils for what they are: Politicians are bad for business and bad for your pocketbook.
Why Stocks Do A Lot Better When Congress Is Out of Session
In order to answer the question of why stocks do a lot better when Congress is out of session… Singer has gone back to 1963, “When we went off the silver standard.” He finds that the S&P 500 Index has gone up only 1.6% a year during the time when Congress is in session… and a whopping 17.6% annually when Congress is in recess.
Source: http://www.congressionaleffect.com/about.php
Economists Michael Ferguson of the University of Cincinnati, and Hugh Douglas Witte of the University of Missouri at Columbia confirmed Singer’s proposition.
They found that since 1897, 90% of the gains in the Dow Jones Industrial Average came on days when Congress was out of session. A dollar invested in 1897 with the strategy of going back to cash every time Congress met was worth $216 by 2000.
But an 1897-dollar invested on the reverse strategy was worth only $2. The correlation got worse after World War I, when Washington started playing a more activist role in taxing, regulating and inflating.
Why is this the case? According to Singer, the correlation was no coincidence.
When Congress is in session, it often raises taxes on individuals and businesses, increases regulations, and hurts public-traded companies. He points to a few recent examples:
- When a Health Care Task Force was formed in 1992, health care companies lost $100 billion in market value until the Task Force appeared to end.
- On October 24, 2007, the House of Representatives held hearings on legislative proposals to reform mortgage practices in an attempt to help consumers cope with rising numbers of mortgage defaults. On that one day, the Investors Business Daily (”IBD”) Group 196 Index, which includes Mortgage and Related Services Companies, fell from 577.64 to 559.17 – a decline of 3.2% across an entire industry.
- On Saturday, December 1, 2007, the House reached a compromise on a bill that would impose higher fuel mileage requirements on car manufacturers. The following Monday, IBD Group 105 Index, which includes car companies, fell by 9.67 to 642.22 – a decline of 1.5%.
Congress creates uncertainty in the business world, and Wall Street hates uncertainty. As Singer says, “Talk is not cheap.” But it can be lucrative.
How to Profit from “The Congressional Effect”
What to do? You can take advantage of this knowledge in your own investment strategy by being more conservative when Congress is in session (as it is now), and more aggressive when it’s on vacation.
Or you can invest in Singer’s no-load fund. Singer has made it easy to profit from “The Congressional Effect.” On May 23, 2008, he created “The Congressional Effect Fund,” a no-load fund with $1,000 minimum. As of writing this, it’s already up 0.7% while the S&P 500 Index is down 9.3%.
It invests in the stock indexes when Congress is out of session, and in interest-bearing accounts when they are in session. It’s that simple. Of course, this requires the fund manager to switch assets 15 to 20 times a year, but in today’s efficient marketplace, it’s not that costly.
When it reaches $10 million in assets it will get a symbol, like any new fund. Meanwhile, you can invest directly. Just go to www.congressionaleffect.com.
Good trading,
Mark
The Investment U Crib Sheet – Asset Allocation:
The Right Mix of Stocks, Bonds, Real Estate and Precious Metals
Successful investing begins by conceding that – to a degree – uncertainty will always be your companion.
You can guess what the market is going to do and be right or you can guess and be wrong. No one guesses right consistently. So we don’t waste time here.
Instead, we follow a wealth-building investment formula that won Dr. Harold Markowitz the Nobel Prize in finance in 1990. His paper promising “portfolio optimization through means variance analysis” demonstrates how to maximize your profits and minimize your risk by properly asset allocating and rebalancing your portfolio.
Following this model and rebalancing annually ensures our portfolios will be well diversified and positioned to profit in any market condition. And yes, investing success can be this straightforward.
Learn more about The Oxford Club’s asset allocation model here.
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