Congress Out, Stock Market Up
Take a wild guess: Do you think the stock market performs better or worse when Congress is in session? You're right, it performs worse. Much worse.
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 and held it only on the days when Congress was in session (and vice versa for when they are out of session), here are your returns through the year 2000:
In session: $2
Out session: $216
As I said when I blogged about this last year, that's no typo. Over the course of 103 years, you would have only doubled your money had you stayed invested in the stock market while Congress was in session. But you would have hit a 216-bagger when the politicians weren't in DC. You can read more here.
So how did the stock market perform in 2007? In a very predictable way. Here are the S&P 500 returns (the S&P 500 is more representative of the market than the DJIA):
In session: -2.8%
Out session: +7.0%
During this past year, the stock market was up 51% of the time (97 days out of 189) under the In-Session scheme. That's compared to 61% of the time (38 days out of 62) for the Out-Session scheme. Volatility was largely the same among the two portfolios for 2007, even though historically it's very tame when Congress is out, and very wild when Congress is in. The daily High/Low margin last year was 1.35% for the In-Session scheme; 1.38% for the Out-Session scheme.
There's an international flavor to this "DC Effect" as well. Here are the Shanghai stock market returns in China under the two schemes (Since Shanghai is 13 hours ahead of DC, I add a day. So if Congress is in session on Jan. 2, then the "in session" day for the Shanghai Exchange is Jan. 3. If there is more than a one-day margin, than the next market day is not counted. This is arguably very imprecise.):
In session: 23.87%
Out session: 68.75%
I encourage anyone to test other markets to see if there is a noticeable margin. But the bottom line is that markets don't like risk. And there is definitely risk associated with the congregation of politicians in our nation's capital.
