Got cash sitting on the sidelines? It may be time to move some of that cash into play, according to Mark Hulbert writing on Marketwatch.com. “Believe it or not, the stock market performs much better than average when Congress is not in session.”
Congress goes into recess on Friday; this could be your opportunity.
No News is Great News
All kidding aside, it makes perfect sense that an effect such as this exists. Political risk is just another form of risk which can lead to skittish investors. Uncertainty is what causes volatility in the stock market. In fact, uncertainty is the reason the stock market returns more, historically, than treasuries (with more risk comes more reward). Read the full study on the ‘Congressional Effect’ here.
Ed note: After I posted this article, Chuck Jaffe followed up with an excellent writeup on a mutual fund which adheres to this strategy. The fund website can be found here.
Take a look at the VIX index, also know as the “fear index”, vs. the S&P 500. VIX is the CBOE volatility index, a measure of implied volatility of the stocks on the S&P 500. It is calculated from options on S&P 500 stocks- both pricing and volume. VIX can be said to gauge investor fear or uncertainty of the market. Fear in general is a bad thing for stocks. Fear of policy is a legitimate fear.
Send a Senator Home Today!
Tonight, Congress will be home, not passing any bills, and not speaking in front of any cameras. The press conferences will temporarily halt. Health care, cap and trade, and F-22s will be out of the limelight (well, cap and trade and F-22s). All of this means that there is more certainty about the immediate future. If you accept that the stock market is forward looking, the market will try to accurately discount any progress on laws that can affect the businesses represented. For this reason, uncertainty will decrease (no laws will pass). The study even highlights the fact that lower Congressional approval ratings mean outsized gains… any rating under 39% specifically. 30.6% approval ratings puts us in the sweet spot.
Of course, Congress going home isn’t the only political event which has bearing on stocks. Check out this study on stock returns for corporations which donate to political candidates. The study also shows a stock return correlation when employees are named to political posts, or leave for the government. There is even a comparable decline when former employees leave political office. Strange…
In general, your best bet is on a Congress which doesn’t try to do too much. When the gears of Congress get jammed up, the stock market performs best. That’s right… the biggest stock market returns have come under a Democratic President with Republican control of the House and Senate. Yes, when the government grinds to a halt under the burden of conflicting ideologies, it is the best time to invest. Politics… an overlooked indicator? What do you think?
Stock board thumbnail sourced from www.flickr.com/photos/19082205@N00/3051500551, shot by Katrina Tuliao.
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