Friday, September 03, 2010

We Lose Money Every Time Congress is in Session: Let's Tell Them to Go Home and Stay Home!

If you're over 35 years old you probably know this fact: that when the politicians hightail it out of Washington for one of their recesses the markets do well. When they're in Washington taxing and legislating the markets do poorly. Read the article below.

With Congress out of session for its August recess, one innovative fund manager is busy making money for clients who share his view that an inactive government is good for the stock market. Armed with data and a successful track record, Eric Singer is using his unique strategy to make profits and a point about avoiding the most dangerous element in any investment decision: political risk.

Singer’s Congressional Effect Fund takes its name from the phenomenon he helped prove: when Congress acts, markets suffer. In 1992 while working for a New York investment firm, Singer noticed a recurring pattern of exceptional stock performance. The “January effect,” was followed by stock market “rallies” during the summer, at Thanksgiving and Christmas. It occurred to him that in each boom period Congress was out of session.

So, he looked at the data to see if there was a correlation. Going back to January 1, 1965, Singer studied the performance of the S&P 500 Index on days when at least one house of Congress was in session compared to when neither house met for business. The results confirmed his intuition. On days when at least one house was in session, the S&P 500 had an average annualized price gain of +.94%. Alternatively, the Index gained +16.04% when neither house was in session.

The explanation is simple. Investors fear government action because it always involves change. Changes in rules and regulations cause uncertainty. That uncertainty leads to risk-averse behavior like banks reducing lending, landowners refusing to develop real estate and employers refusing to hire more staff. By driving wealth creators to the sidelines, government action makes the nation poorer.

Though intuitive to most business owners, the “congressional effect” is hardly conventional wisdom with financiers or academics. When Singer first published his findings a team of experts tried to disprove him.

They ended up making an even stronger case for Singer’s position.

In a 1997 study titled, “The Congressional Calendar and Stock Market Performance,” three university professors and a private financier concluded:

“Almost the entire advance in the market since 1897 corresponds to the periods when Congress is in recess. This is an impressive result, given that Congress is in recess about half as long as in session. Furthermore, average daily returns when Congress is not meeting are almost eight times greater than when Congress is in session. Throughout the year, cumulative returns during recess are thirteen times that experienced while Congress is in session.”
...READ "Investment Funds Show that Betting Against Congress is a Great way to Make Money" at Center for Individual Freedom.

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