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

Lame Duck Sessions

By now the reader should suspect that the concept of the Congressional Effect is that less government is generally better for the market. So out-of-session days are historically better because there is less risk of government action. In each election cycle, there is a period after the new Congress has been elected, but the old one is still in session. That period, commonly referred to as the lame duck session of Congress, is a particularly good time to invest. Very little major legislation is likely to get done during these sessions because the members who are returning want any new laws to be attributable to their next term. You might as well call it vacation. Not surprisingly, then, the lame duck returns of the market are several times the average return of the market. On an annualized basis, using the DJIA, since 1928 the market has returned an arithmetic average annualized gain of 19.48 percent during this little less than two-month period. No doubt, part of the return may be accounted for by year-end efforts to mark up stocks, but it is a statistical outlier for another two months out of every four years to be so much higher than the market average.

In general, when there is a new president, the lame duck period averages an annualized 16.47 percent, while the same president reelected averages 20.82 percent. The market likes the lack of surprise, although this is not a very big difference. This is confirmed by the fact that when the political party of the ...