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

Economic Lifeblood: Investment Capital Formation, the Stock Market, and Congress

In order to get a feel for the persistence of Congress's dysfunctionality, it is worth taking a longer and somewhat cumulative view of regulatory constraints imposed on various industries. I'll start with the securities industry, having grown up in it. This brief, noncomprehensive overview covers disclosure rules, trading rules, sell-side research, Sarbanes-Oxley, and Dodd-Frank. Although it is a little bit like saying I am concerned that motherhood and apple pie are not always good, I will start with a regulation that on its face was uncontroversial: Reg FD. This disclosure regulation, supported by Congress and mandated by the Securities and Exchange Commission (SEC), required all companies to speak to analysts at the same time and to disclose material information to the entire market all at the same time. While its goal was laudable, it still results in less information reaching the market and less committed holders. It also played a role in reducing the number of research analysts, which I think has permanently hurt the U.S. capital markets. It was symptomatic of an attitude toward the entire capital formation industry that has taken us on a strange course. It also exacerbated a two-tier market: large companies did have research and got more of the long-term commitment that comes from thinking you understand a company, while smaller companies lost research support and sponsorship.

The next shoe ...