Washington is awash in scandals. All of this distraction is surely bad for the US stock market and economy, right?
To the contrary. “Do-nothing Congress” may originally have been a pejorative term directed at the 80th Congress by President Harry Truman. (The last Congress, the 112th, put Truman’s to shame.) For investors, it means something entirely different: better returns.
Several analysts have observed that the stock market tends to do better when Congress isn’t in session. Eric Singer, manager of Congressional Effect Management, has made a career of, and written a book on, just such an effect.
So what’s behind the idea of legislative risk? I called Singer to find out why the market tends to outperform when Congress isn’t in session.
“There are 535 men and women who wake up each day trying to become an ‘issues entrepreneur’ by championing legislation,” Singer said.
To the extent that Congress is distracted by scandals, it should limit legislative initiatives. But the surest way to capture the congressional effect is to be invested only when Congress is out of session, Singer said. His mutual fund invests in the Standard & Poor’s 500 Index when Congress is out of session and is hedged or in cash equivalents when it’s in session.
Such a strategy would have paid off handsomely in the last 115 years. One dollar invested in the Dow Jones Industrial Average in 1897 during in-session days would have compounded to $2 at the end of 2012, Singer said. The same dollar invested during off-session days would have appreciated to $300. These statistics measure price change only.
The congressional effect would seem to apply to the overall economy, as well. To the extent that Congress writes rules and regulations that curtail businesses’ freedom, impose additional costs and interfere with the voluntary exchange of goods and services, lawmakers prevent the economy from reaching its potential.
Bloomberg View