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

Chapter 7

Sidestepping Congress's Wealth Destruction with a Macro Approach

What if you could have a portfolio that filtered out much of the bad news and its impact on your portfolio, and pretty much reacted only to the good news your companies generated? It would probably feel like waking up and finding yourself in a beer commercial having a blast with your ideal buddies, or living in a MasterCard commercial doing something “priceless” with your family like diving into tropical waters from your own yacht.

The Congressional Effect approach can't guarantee the lack of bad news or even the yacht (especially the yacht), but it does allow you to tactically allocate a portion of your assets so that they are usually less proportionately affected than most domestic portfolios by news from the government. In effect, by screening a disproportionate amount of news that is political, your portfolio will tend to trade more based on the commercial news cycle, which is a more predictable cycle. CEOs are paid to guide shareholder expectations accurately and suffer when (for example) there are negative earnings surprises. By contrast, they have little influence over what Washington might do, so bad news from Washington can make their stock more volatile. The Congressional Effect approach emphasizes the pure commercial news flow and stays neutral for the time legislators are in session. So it is a less volatile way of investing.

This chapter shows you how to systematically apply the Congressional ...