Last Updated on June 19, 2022 by Quantified Trading
The Congressional Effect in stocks– we suspect you have never heard of it. Neither had we! But this is one of the many seasonal effects in the stock market. The man behind the effect, hedge fund manager Eric Singer, had so much faith in this seasonal effect that he set up a fund to profit from it.
The Congressional Effect is a phenomenon that happens when the US Congress is in session. The Congressional Effect is simple: The stock market performs better when Congress is not in session! When Congress is in session both performance goes down and volatility goes up.
This is the strongest effect and seasonality that you probably have never heard of:
The Congressional Effect in stocks- what is it?
As early as 1992 Eric Singer wrote an article in Barrons that first mentioned the Congressional Effect: Legislator, Go Home! –- How Congress Can Help the Stock Market.
Eric Singer found out that the S&P 500 had better performance and less volatility when Congress was not in session. From 1965 to 2008 Singer found out that in session days saw an annualized price increase of only 0.94% while out of session days had an annual increase of 16.05%. In other words, a solid outperformance! The numbers are even more astonishing considering that in session days are only 34% of the total trading days.
Why does the Congressional Effect work?
It has been argued the effect is a political one: Congressional harm done by politicians. Mark Twain, the wordsmith, once remarked that nobody’s life, liberty, or property is safe while the legislature is in session.
The more Congressional impact, the more intrusive and abusive government interventions. The more interventions, the less growth and unintended consequences. Singer wrote this in his book:
We believe the effects of Congressional action and deliberation have a significant and predictably negative impact on investment performance. We believe that Congressional “cures” are almost always worse than the disease, and that Congressmen have little understanding or appreciation for the unintended adverse consequences of their legislation…….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”.
The logic is: when Congress is not in session they do the least amount of damage.
Sessions days in Congress
A quick search reveals that 2021 had 160 in session days – more than half of the year’s trading days. This makes the outperformance even more remarkable.
In the prospectus of Eric Singer’s Congressional Effect Fund it says that for the period from January 1, 1965-December 31, 2009, Congress was in session each year an average of approximately 66% of eligible business days.
Subsequent research on the Congressional Effect
After Singer published his findings, he even wrote a book about the effect, there has been more research on the subject.
Micheal Ferguson and H. Douglass Witte published a report named Congress and the Stock Market which concluded positively, even adjusted for other known seasonal factors. The authors concluded:
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 conclusion above was confirmed by Lamb, Ma, Pace, and Kennedy in a study named The Congressional Calendar and Stock Market Performance. Their findings show that almost the entire performance in the Dow Jones from 1897 happened during out of sessions. The authors found this outperformance extraordinary given that Congress spends more time in session than out of session.
The Congressional Effect Fund
Eric Singer went on to set up a fund that is only invested in the S&P 500 during the out of session days. It was set up in 2008, but we have not been successful in getting any info on the performance since then.
Why is the Congressional Effect mostly unknown?
Most likely because it’s a political seasonality. For some, it might even be unethical investing.
But if you are looking for great returns, the Congressional Effect in stocks might be something to consider.