Aug. 2 (Bloomberg) — Weekdays in August are a good time to own stocks. The end of October isn't bad either. Christmas can be fine for equities as well.
What these dates have in common is that they are times when Congress isn't in session. 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.
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. The popularity of Congress mattered as well. Looking at Harris and Gallup polls, Ferguson and Witte found that market returns were yet lower when unpopular Congresses were in session. The two economists controlled for weather and seasonal behavior. The Congressional effect was still strong.
'Talk Is Not Cheap'
Both Singer and the Ferguson/Witte team suggest uncertainty is causing the difference. Politicians have long noticed that markets don't like regulation. What they sometimes fail to notice is that markets don't like even the prospect of regulation. (Chuck Schumer and Hillary Clinton, this is for you — New York senators seem to specialize in ignoring market anxiety.)
Market guru Burton Malkiel once wrote: "It is not so much the direct cost of regulation that has inhibited investment but rather the unpredictability of future regulatory change." Or as Singer puts it, "talk is not cheap."
Since Democrats are perceived as more unpredictable when it comes to regulating business, the Congressional effect should be stronger when Democrats control Congress. And Ferguson and Witte found that to be the case. Franklin Roosevelt was one of the most unpredictable of presidents. It therefore comes as no surprise that the 1930s were the most volatile decade for the Dow.
To be sure, there is a certain circularity to all these arguments: Congress may be active because things are bad, rather than causing trouble by its activity. And there are exceptions that don't show the Congressional effect.
"The rule does not work well in a blow-off bubble," Singer says. "It works better in bear markets."
Even some exceptions fit a variant of his thesis. 1998 was a good year, though Congress was in session. Singer tries to explain it was clear in 1998 that Congress wasn't going to do much. By forcing President Bill Clinton to defend himself in scandals, Republicans effectively prevented both him and themselves from undertaking any major legislative initiative.
How to profit from the effect? To ensure your money is in stocks during all Congressional holidays and all in cash when Congress is in Washington, you'd have to go in or out of the market 15 or 20 times each year. Singer doesn't say how he's addressing such challenges, or share his results.
Still, the facts are there: If you applied his thesis from the end of 2000 through 2005, and stayed out of the S&P 500 while Congress was working, you earned close to 7 percent a year. If you stayed in the S&P 500 the whole time, the annual total return (including dividends) was less than 1 percent. There may be money in ideology, after all.
You don't have to buy into any political philosophy to find the Congressional effect interesting — if only as an explanation for why some people stay at their terminals right up to Labor Day. Congressional breaks are short, but to investors, they feel like an endless summer.
(Amity Shlaes is a Bloomberg News columnist. The opinions expressed are her own.)
© Copyright 2006 Bloomberg
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