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

Summary

The limits of MPT are that short-term prices are not always randomly distributed, so it is possible to achieve market returns without taking full market risk over full investment cycles.

So the data are overwhelming. But what does the data really say? Modern portfolio theory assumes that reward is always commensurate with risk. But as we have seen, there are many assumptions built into MPT that are questionable. Historically, trading the Congressional Effect, over long periods of time, investors can capture returns that are comparable to the broad stock market, but have much less the risk. This is a big claim, but it is what happens when legislative risk is systematically reduced.

MPT says this should be impossible, because higher returns must be compensated for with higher risk, but in this case higher returns would have been achieved without higher risk. Now that we know the statistical evidence supports the existence of a Congressional Effect, it is time to turn to the cause of the Congressional Effect—Congress.