A plaque remaining from the Big Apple Night Club at West 135th Street and Seventh Avenue in Harlem.

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Entry from September 26, 2010
Congressional Effect

The “Congressional Effect” is the name given to the theory that stock prices rise when the Congress is not in session. Eric T. Singer, creator of the Congressional Effect Fund in 2008, had written a paper in the March 2, 1992 edition of Barron’s titled “Legislator, Go Home! –- How Congress Can Help the Stock Market.” Singer’s November 8, 2006 article in the New York (NY) was titled “Congressional Effect.” Singer’s Sun article seemingly denied creating the name himself, stating: “Some observers have called the phenomenon I write about the Congressional Effect.”

A March 2005 study by Michael F. Ferguson and Hugh Douglas Wiite, Congress and the Stock Market, appears to have coined the name “Congressional Effect.”


Wikipedia: Congressional Effect
The Congressional Effect is a stock market phenomenon where stock prices tend to show a correlation in performance and volatility to the operating schedules of the US Congress. The phenomenon was coined as “The Congressional Effect” by Eric T. Singer, a New York based finance professional and mutual fund manger.

Singer found that in aggregate, the S&P 500 Index performs better on days both houses of Congress are Out of Session versus days when both houses of Congress are In session. There is also a decrease in volatility as measured by Standard Deviation.

Congressional Effect Management found that the S&P 500 Index had a daily annualized price appreciation of 0.31% on days Congress was In session from January 1, 1965 to December 31, 2008. Over that same time span there was a 16.15% annualized price gain on trading days Congress was Out of session. From January 1, 2008 to December 31, 2008 Congressional Effect Management shows an acceleration of the Congressional Effect. Over the aforementioned span In session days saw an annualized price decrease of -12.45% while Out of session days saw an annualized increase of 8.81%.

The Effect was first reported on in Barrons on March 2, 1992 by Singer and entitled “Legislator, Go Home! –How Congress Can Help the Stock Market”.

Subsequent Research
1) March 13, 2006 Michael F. Ferguson and H. Douglass Witte published a piece entitled “Congress and the Stock Market” which concluded, “We find a strong link between Congressional activity and stock market returns that persists even after controlling for known daily return anomalies. Stock returns are lower and volatility higher when Congress is in session. This “Congressional Effect” can be quite large – more than 90% of the capital gains over the life of the DJIA have come on days when Congress is out of session.”

2) In 1997, a study published by Reinhold P. Lamb, K.C. Ma, R. Daniel Pace, and William F. Kennedy titled “The Congressional Calendar and Stock Market Performance” demonstrated that “almost the entire (DJIA) market rise since 1897 corresponded to the periods when Congress was closed. An open Congress sees only a small market rise. This behavior is amazing given that Congress is open almost twice as long as it is closed.”

Congressional Effect Fund (CEFFX)
On May 23, 2008 Singer launched the Congressional Effect Fund (symbol:CEFFX), a mutual fund which seeks to take advantage of the Congressional Effect for investors.

Congressional Effect Management
WHAT IS THE “CONGRESSIONAL EFFECT”?
Historical research indicates that, more often than not, when Congress is in session there is a negative effect on equities markets (the “Congressional Effect”) due possibly to investor fear and uncertainty surrounding government action—or possible action – as well as unintended adverse consequences on the stock market of Congressional legislative initiatives.

Congressional Effect Management has analyzed empirical data from January 1, 1965 through December 31, 2009 to determine the performance of the S&P 500 Index on days that Congress was “in session” (a day when either house of Congress meets for business) and “out of session” (a day when neither house meets).

For the period from January 1, 1965-December 31, 2009, according to the Library of Congress, Congress was in session each year an average of approximately 66% of eligible business days and out of session an average of approximately 34% of eligible business days. During this period, the S&P 500 had an average annualized price gain of +16.04% (an average daily price increase of 0.06%) on days when Congress was not in session, and an average annualized price gain of +.94% (an average daily price increase of 0.01%) on days when Congress was in session. The average annualized price gain for all days during the period was 5.9% (an average daily price increase of 0.03%).

We believe that these gains are not coincidental, but rather reflect the cumulative effect of unintended adverse consequences on the U.S. stock market from anticipated and actual Congressional legislative initiatives. We refer to this effect as the “Congressional Effect”.

Social Science Research Network
Congress and the Stock Market
Michael F. Ferguson
University of Cincinnati - Department of Finance - Real Estate
Hugh Douglas Witte
University of Missouri at Columbia - Department of Finance
March 13, 2006
Abstract:
We find a strong link between Congressional activity and stock market returns that persists even after controlling for known daily return anomalies. Stock returns are lower and volatility is higher when Congress is in session. This “Congressional Effect” can be quite large - more than 90% of the capital gains over the life of the DJIA have come on days when Congress is out of session. The Effect varies systematically with the public’s opinion of Congress: returns are lower and volatility higher when a relatively unpopular Congress is active. Public opinion appears to play a fundamental role in market prices. This is consistent with a mood-based explanation that sees Congress as ‘depressing’ the average investor. Alternatively, our results can also be reconciled with rational explanations that view Congressional activity as a proxy for regulatory uncertainty or rent-seeking behavior.
Keywords: stock market, Congress, anomalies, behavioral finance
JEL Classifications: G1, G10, G14, G18
Working Paper Series
Date posted: March 21, 2005 ; Last revised: March 20, 2006

HuntInvest.com
study finds stock returns lower when Congress in session
Posted by on April 3, 2005, 10:39 pm
The April 11, 2005 issue of Business Week mentions an amusing study finding that “stock returns are lower and volatility is higher when Congress is in session”. The paper can be obtained in PDF format from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=687211 , and the abstract is below.

Financial Webring Forum
Congressional Effect
by DenisD » 28Jun2005 00:49
From today’s column by Mark Hulbert at http://www.marketwatch.com

But a new academic study has found that, historically, the stock market has performed significantly better when Congress is not in session.
...
The so-called “Congressional Effect” that they studied is quite large. They found, for example, that “about 90 percent of the capital gains over the life of the Dow Jones Industrials Average have come on days when Congress is out of session.”

The professors were careful to check for whether this Congressional Effect was simply a different kind of seasonal pattern in disguise. After all, Congress is not in session during holidays, and it has been well known for some time that the stock market performs at an above-average rate immediately prior to those holidays.

To be sure, the professors did find that these seasonal patterns accounted for some of this Congressional Effect. But not all. So they are inclined to believe that there is a genuine relationship between the stock market and whether Congress is in session.


New York (NY) Sun
Congressional Effect
By ERIC SINGER | November 8, 2006
(...)
Consider the record, as based on the Standard and Poor’s 500. Markets have shown an important pattern. They tend to go up when Congress is least likely to do damage — when lawmakers are on recess.

Over the years, I’ve tracked the numbers. Since 1965, the market has gone up about four times as much each day Congress is on vacation (.0008% price increase), than when the lawmakers are at work (.0002%). In some quarters, there have been cries against having a “Do Nothing” Congress, calling for increased attendance. It has been bruited about that Congress is working too little, taking too much time out to raise money at home with constituents and others. If only they would do nothing! And promise it! And deliver! The data from the past suggests that a stock market with daily returns not impeded by Congress could easily return over 20% annually. Some observers have called the phenomenon I write about the Congressional Effect.
(...)
Mr. Singer is general partner in the Singer Congressional Fund.

New York (NY) Times
If Congress Stalls, Do Stocks Rise?
By JEFF SOMMER
Published: September 25, 2010
(...)
The researchers found that more than 90 percent of the price gains over the 108-year life of the Dow Jones industrial average through 2006 came on days when Congress was out of session. And in periods when polls showed that Congress was least popular, this “Congressional effect” was most pronounced.

Their work was inspired by a 1992 article in Barron’s titled, “Legislator Go Home!” by Eric T. Singer, then an investment banker, who reached the same conclusions. Two years ago, he founded the Congressional Effect mutual fund, which has outperformed the market. The fund’s strategy is to abandon stocks when Congress meets, and to invest in them when it recesses.

The idea, he said, is “to capture the returns of the stock market while limiting political risk.”

Posted by Barry Popik
New York CityGovernment/Law/Politics/Military • (0) Comments • Sunday, September 26, 2010 • Permalink