With the nation just one month away from a debt showdown that could rock financial markets around the globe, it has come down to this: The Senate will play nice with President Obama and ceremoniously forgo its traditional July 4th recess, hunkering down in humid Washington for the duration.
What will be accomplished budget-wise by this forced sequestration along the Potomac remains to be seen, but one thing is pretty certain: Investors would be better off if the legislators just went back home and ate some rhubarb pie at the county fair. When Congress is away, Wall Street tends to celebrate.
Congressional recesses are a bull’s best friend. US stocks perform better by a wide statistical margin when Congress is not in session. After a rocky June that was only salvaged by a four-session winning streak last week, the fact that the congressional talking heads will be out in force on cable TV all through July doesn’t bode well for stocks.
Indeed, the advantage to investing only on those days when Congress isn’t in Washington is quite large. According to a study by Professors Michael Ferguson of the University of Cincinnati and Hugh Douglas White of the University of Missouri, 90 percent of all the capital gains over the life of the Dow Jones industrial average have come on days when Congress is out of town.
Even stripping out the seasonal lulls that might occur when coincidentally Congress is on vacation, the correlation remains very strong. Here’s the math, according to the professors: Between 1897 and 2004, the Dow produced an annualized return of 5.3 percent when Congress was out of session, but was up a mere 0.4 percent — not even enough to keep pace with inflation — when lawmakers were at work in Washington.
Fortunately for investors, the congressional calendar remains packed with ample opportunities to get out of town next month. President Obama may have killed the July 4th break, but another recess is soon. Lawmakers will be off for another month beginning Aug. 8.