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

Summary

Whenever Congress adds a new layer of in-depth regulation for an industry, the regulation usually has unintended consequences that adversely affect that industry and the sectors of the economy that industry serves. As evidence, this chapter took a closer look at the finance and health care and coal sectors. In finance, the wave of new regulation over the past 10 years has made our markets more volatile, less helpful to small companies, and arguably more dangerous for the small investor, and reduced the relative market capitalizations of the companies in that industry as part of the Congressional Effect. In health care, massive new regulation severely impacted the stock prices of the industry, both in 1993 when it was proposed and failed, and in 2008 through 2010, when it became law. Companies, knowing that their stock prices will suffer no matter what, have the bad choice of either embracing more regulation to shape it to their advantage, or resisting it. The coal industry has suffered greatly from both new sources of energy but in particular from massive new regulation. Either way, once Congress has an industry in its sights, that industry will suffer from both a regulatory point of view and, as a result, a market value point of view. President Reagan's famous saying was that the nine most dangerous words in the English language were: “I'm from the government and I'm here to help.” It applies with even more force when Congress says it.