Trade the Congressional Effect: How To Profit from Congress's Impact on the Stock Market

Chapter 1

What is the Congressional Effect?

Congressional talk is not cheap. In the summer of 2011, the awful spectacle of Congress's inability to timely resolve the budgetary issues regarding our debt cap and the resulting downgrade of United States debt took a heavy toll on the stock market. What is so disturbing is that in their brinksmanship, our lawmakers never seem to consider just how much their actions cost us. What is truly upsetting is the amount of wealth destroyed merely by political talk, even when that talk doesn't lead to action. This wealth destruction is the Congressional Effect. It is empirically demonstrated in the aggregate by looking at how the stock market is affected on a daily basis by Congress. In turn, this broad Congressional Effect is generally comprised of a series of legislative impacts on sectors and, sometimes, individual companies.

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. This enormous difference between in-session days and out-of-session days is not coincidental, but rather reflects the cumulative effect of unintended adverse consequences on the U.S. stock market from anticipated and actual congressional legislative initiatives. Whenever Congress focuses on an industry with the potential for changing the rules for that ...