When Congress Is Away, the Market Will Play

Anxious investors can take heart: Congress’s August recess begins at the end of this week, which has historically been a good thing for the markets. Michael Ferguson and Hugh Douglas Witte found that “about 90% of the capital gains over the life of the Dow Jones Industrial Average have come on days when Congress is out of session.” The finding could of course be a fluke but Ferguson and Witte found the relationship to be particularly strong when Congress’s approval ratings are lower. They point out that when Congress is in session, companies and investors face “a more uncertain tax and regulatory environment.” (HT: James Altucher) [%comments]

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  1. Sean Herdman says:

    Not surprising given how often Congress is out of session!

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  2. Spooner says:

    Maybe it’s because congressmen are all campaigning, making grandiose promises, and investors believe them.

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  3. David says:

    This really seems to run counter efficient market theory.

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  4. Yoni Levitan says:

    Could this just be an example of data mining?

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  5. Stephan Wehner says:

    The article says “Dow between 1897 and 2004 produced an annualized return of 5.3% when Congress was out of session, in contrast to just 0.4% when it was in session.”

    Would it follow that one might as well close the stock market “when Congress is out of session”. How many days would that be in a year?

    Stephan

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  6. Bobby G says:

    Is it just me or are some of the commenters above not getting the point of this post?

    I think the summary post above caught the key element of this analysis: investment, a practice of strategic risk analysis and opportunism, works best when (at least) market rules are stable. Since Congress has a horrible habit of creating rules to “solve” “problems” in the market (often compounding problems or making problems where there were none before), investors are hesitant to throw money at a company if Congress may make a silly law that will negate most of the investment benefit, either to the company or back to the investors.

    Once the rules are established, or as I like to say the hurricane has come and gone, investors go about their business trying to rebuild the economy of investing. While they may have been left with a market rife with more inefficiencies, at least now they can identify present-term risk, for a while.

    So David (#3), no, it doesn’t run counter to efficient market theory, it reinforces it… Except in the case of a market failure, markets operate most efficiently when left alone. Granted, no markets these days are without government interference, but at least when that interference is stable the market can try to optimize itself. When the next wave of changes come in, people pull their money out and try to see where everything lands before finding the profitable investments (which may or may not be different from the truly profitable investments, were the government to stay out of the markets).

    And as for Stephan (#5), I hope you mean close the stock market when Congress is in session, not when it is not in session. The point is to grow the value of investments and grow the economy in the process (think about the equation for GDP). Even so, the solution isn’t to make the market adapt even further to the government bureaucracy, it’s to make the government stop messing around with efficient markets.

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  7. Jay says:

    Maybe Congress adds extra/extended sessions when times are tough, so the link would be a spurious one.

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  8. Charlie Asbornsen says:

    Buy on the rumor, sell on the news. Rumors spread in a news vacuum and investors are an optimistic bunch. When congress is in session and passes regulatory legislation, budgets, etc. they take the wind out of the investor’s sails. Or maybe they just make decisions that are so bad that no investor in their right mind could foress them. Except Warren Buffett, of course.

    Stephan, wouldn’t it be better to close Congress when the market was in session?

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