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

The Magnitude of the Crash of 1987 Refutes MPT

I still think the magnitude of the 1987 crash alone refutes MPT. A 22 percent move in one day of the entire equity market is simply too big to consider the market as being efficient. One of MPT's key axioms is that the returns of an investment are normally or randomly distributed, so it makes little sense to try to time the market. In our financial culture, the vast majority of financial professionals embrace MPT to a greater or lesser extent. In a generally rising stock market with high transaction costs, as it was from Eisenhower through Clinton, it made historical and intellectual sense for brokers, financial advisers, and portfolio managers to use MPT as a justification for never timing the market. The popular thinking was that missing the handful of big up days could cause you to underperform the broad market. The episode of the Crash of 1987 invites the retort to MPT that if you can avoid the biggest down days in the market, you might do better. Congress was in session when it set in motion that crash.