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

The 2012 Election and Beyond

There is some statistical evidence that the third year of a presidential cycle is good for investors. The usual explanation for this pattern is that presidents push to expand the money supply in the year preceding a presidential election. A study published by the CFA Institute found that monetary policy was expansionary 65 percent of the time during a president's third year in office versus 48 percent for the other three years. They also find that fixed-income returns are below average in the third year of a presidential term. However, this indicator has not been as good over the last three presidential terms as it formerly had been.

As this book is going to press, it is unclear how the election will turn out, at least to me. It is, after all, months before the election. There seems to be a good chance that the Republicans will win the Senate. Looking at the albeit brief and therefore statistically suspect history from 1973 through 2011, it turns out that Republican Senates are much worse for gold returns, with the average arithmetic return being 0.77 percent annually, as compared to 16.94 percent for Democratic Senates. In a historically rising stock market this has compelling implications for Democrat Senate historical real returns compared to Republican Senate real returns. In fact, the Republican Senate real returns average over 18 percent annually, while Democratic Senate real returns result in a loss of over −3 percent annually. A united Congress ...