Stocks Go Up When Congress Isn't In Session

Amity Shlaes reports:

Back in 1991, a Wall Streeter named Eric Singer noticed that equities that year tended to do better when lawmakers weren't in Washington. He published an op-ed in Barron's proposing that the correlation was no coincidence.

Later, he looked at a wider timeframe and went around the squash courts of New York telling people he might write a book about his thesis. Now Singer is going one step further. He has created a hedge fund, Singer Congressional Fund. Its goals include making money from the Congressional calendar.

Neat idea, and one bound to appeal to doctrinaire free- market thinkers. But market people disdain ideologues. Their question is: Do Congressional holidays and the market's movements truly correlate?

As it happens, yes. Choosing the Standard & Poor's 500 Index as his measure, Singer reviewed 40 years of stock data and government calendars. At least one chamber is in session for more than half of the 250-odd trading days of the year. Yet the index made a greater share of its price gains when Congress was in recess -- at least two to three times greater per day.

Singer isn't the only one to find a relationship. Economists Michael Ferguson of the University of Cincinnati and Hugh Douglas Witte of the University of Missouri at Columbia reviewed four indexes: the Dow Jones Industrial Average, the S&P 500, the Center for Research in Security Prices value-weighted index and the CRSP equal-weighted index.

Congressional Effect

For the Dow, the results were dramatic. Since 1897, the year after the Dow was created, an impressive 90 percent of the gains came on days when Congress was out. Their charts show that 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 after a century. The big gap between performances began to show up after World War I, when it became clear that Washington would play a bigger role in the country.

Other indexes also reveal what the scholars call ``the Congressional effect.'' In all indexes but the Dow, daily volatility was lower when Congress wasn't in session.

When Congress is in session large scale theft can happen,which isn't good for investors.That's the nature of coercive power.You'll want to read this whole one.