The 'DC Effect' on the Stock Market
People derisively characterized the Republican Congress in 2006 as the "Do Nothing Congress", as if doing nothing was a bad thing. But as it happens, when politicians do nothing, it does wonders for the economy.
I have calculated that if you had invested $1 in the stock market at the beginning of 2006 and only invested it on those days in which Congress was in session, then your return by the end of the year would be as follows:
In Session (S&P 500): 2.25%
Conversely, if you invested that $1 on days when Congress was out of session, your return would be:
Out Session (S&P 500): 11.56%
That's quite a big spread (9.31% to be exact). Alternatively, if you invested that money in the Nasdaq Composite instead of the S&P 500, the results are even more dramatic:
In Session: -5.70% Out Session: 8.19% Spread: 13.89%
So you're probably asking yourself, "Was this just coincidental?" The cynics out there would say no. And the cynics would be right. Long term empirical evidence says that correlation does, in fact, mean causation. According to two economists, Mike Ferguson of the University of Cincinnati and Hugh Douglas Witte of the University of Missouri at Columbia, if you had invested $1 in the Dow Jones Industrial Average back in 1897 when the index first started and conducted the In/Out Session schemes until the year 2000, here's how much money you would have:
In Session: $2 Out Session: $216
That $2 figure is not a typo. Jaw-dropping, huh?
Bloomberg columnist Amity Shlaes, who covered the Ferguson/Witte study back in August, reported that uncertainty about what politicians were going to do contributed to the negative "DC Effect" on the stock market:
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.)
[...]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.
Congressman Jeff Flake (AZ-06), who was elected in 2000 with Club member support, got it right when he said, "For those who really believe in limited government, then there's virtue in being away from Washington. It's not all bad that we spend less time here. A lot of what we do and a lot of the disdain people have for Washington is because we do too much, not too little."
As the Democrats continue to praise themselves for establishing a 5-day work week for the first quarter of 2007, don't expect the stock market to respond favorably, especially if those days are used to try to pass higher taxes or tighter regulations on businesses like a minimum wage hike or price controls on pharmaceuticals.
