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

The Congressional Effect Data and Launching a Mutual Fund

Armed with these data, I had to do something more than just read about it. In 2006, I asked one of my closest friends to consider opening an institutional-size account that traded only to optimize for the Congressional Effect. It would invest in Spyders (S&P Depositary Receipts; SPDRs) when Congress was out of session, and the cash account at E*TRADE when they were in session. I told him that he would have made money the year before to whet his appetite. He looked at me and said, “You know, Eric, I could really care less about the short term. How did this compare with the S&P 500 going back many years?”

I did a back-test for him. It assumed that one knew every day at 4 p.m. Eastern Standard (New York) time whether Congress would have a legislative day the next day and that you could earn at least what Fed Funds paid every day on your idle cash. It also assumed that S&P dividends are smoothly distributed day by day over the 252.25 trading days in the average year, and it ignored any transaction costs associated with trading. Of course, in real life, Congress can change its schedule at the last second or after hours so that you might not know their schedule at 4:00 every day; specific dividends are paid on specific days by specific companies; and transaction costs and inefficiencies cut into returns when you're actually trading. But the back-test was designed to get a general picture of how the strategy would have done.