The so-called "Do-Nothing Congress" appears to be good for one thing: the stock market.
A new book on how to profit from the actions of Congress finds that historically, less government has generally been better for investors. In "Trade the Congressional Effect," Eric Singer, a mutual fund manager who oversees the Congressional Effect Fund, looked at statistics over time and found that when Congress was in session, there was generally a negative effect on stock markets. The reverse was true when Congress was out of session.
In part, Singer says, this is due to investor uncertainty. But he also believes that Congress thinks too short term, and that Congressional legislation often has unintended consequences.
Singer knows this all too well, having gotten the idea for the Congressional Effect back in the early 1990s, when he was an investment banker trying to raise funds for an industry in competition with cable TV. At the time, the government had put a cap on cable TV rates, which he says caused people in the cable TV business to struggle. Cable TV stocks were hurt, too, as many worried about government action.
"I started thinking: We've heard about a Christmas rally, a Thanksgiving rally, and a Summer Effect [in the stock market]. And one thing they all have in common is that Congress is on vacation," he says.
So Singer started examining the data. And the data affirmed what he had suspected: The market did a lot better when Congress wasn't in session.
As his starting point, Singer looked at a massive study that had already been done on Congress and the stock market, by finance professors Michael Ferguson and Hugh Douglas Witte. The study found that $1 invested in 1897, on days when Congress was in session, would have compounded to just $2 over 108 years. But if that same dollar was invested when the Congress was out of session, it would have compounded to $216 by the year 2005. Singer updated the Ferguson-Witte model by tracking that same dollar up to 2011. And he found that in the space of just six years, the $216 had actually become $300.
Singer also gives a real-life example of the Congressional Effect: health care. "When a congressman says, 'I need to reform health care' in 2007, that's laying down a marker on a new issue," he says, noting that the company United Healthcare was trading at about $55 a share at the end of 2007. After Congress (and presidential) action on the issue, and "at the peak of conversation on health care," he says, United Healthcare hit a low of $17 a share.
Singer cautions that political risk and political make up are still "just one factor of the stock market."
"But the government has gotten bigger in recent years and become more of a factor in the stock market," he says. "And so big government directly impacts your portfolio."
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