Congress, Eric T. Singer argues, is bad for your portfolio’s health. And he’s not referring to just the current dysfunctional Congress. “[C]ongressional dysfunction is the norm and … is likely to be permanent.” (p. 58)
In an article he wrote for Barron’s in 1992 Singer introduced the notion of the Congressional effect—that equities earn less when Congress is in session than when it is not. Trade the Congressional Effect: How to Profit from Congress’s Impact on the Stock Market (Wiley, 2012) updates and elaborates on this notion. For starters, and most compellingly, “from 1965 through 2011, measuring each of the 11,832 trading days during that period, the price of the Standard & Poor’s (S&P) 500 Index rose at an annualized rate of less than 1 percent on days Congress was in session, but over 16 percent on days they were out of session.” (p. 13) Moreover, “the Congressional Effect is growing as government grows and investors become more wary about its impact on the market.” (p. 39)
Singer, who is on the right on the political spectrum, subscribes to Thomas Paine’s advice that “that government is best that governs least.” As a result, he sometimes ascribes to Congress more damaging power than it probably has. For instance, he argues that “the proximate cause of the Crash of 1987 was the inexplicably casual trial balloon of eliminating interest deductions for junk bonds if they were used for acquisitions.” (p. 38) Well, perhaps, and I certainly can’t take the other side of the argument, but on the surface the claim seems a bit exaggerated.
Congressmen are, in the words of one of their own, “issues entrepreneurs.” They look for issues they can use as leverage to gain campaign dollars and voter support. And at least until the passage of the Stop Trading on Congressional Knowledge Act (the STOCK Act) this past March, they were also remarkably good investors, consistently beating the market in a way that only people trading on inside information can. Moreover, “public servants enter Congress from all walks of life, but they almost all emerge rich, and the implication is that they all used their influence to feather their nests." (p. 55)
Congressmen become rich even as their constituents’ equity portfolios languish. So how can you dodge Congress’s bullets? One obvious way is to hold some S&P 500 analog on the days when Congress is out of session and be in cash otherwise. Singer manages the Congressional Effect Fund, which has slightly underperformed the S&P 500 since its inception in 2008 but with much less volatility.
Otherwise, investors can look to value funds, international markets, and gold to help preserve their wealth. Active investors can track proposed regulatory legislation since it “usually has unintended consequences that adversely affect that industry and the sectors of the economy that industry serves.” (p. 110)
Among the highlights of this book are data on the election cycle and lame duck sessions as well as an analysis of Congress’s approach to behavioral finance.
Trading the Congressional Effect is a timely, provocative book. It also illustrates how difficult it is to capitalize on a clearly defined trading edge.