Congress is about to go on recess? Buy! Buy! Buy!
By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- Pencils ready? Here is today's investment pop quiz:
How does the stock market perform when Congress is not in session? Does it do better than average, worse, or does it make no difference at all?
The right answer is timely, of course, since Congress is scheduled to go on recess this Friday. And it isn't scheduled to reconvene until after Labor Day.
Believe it or not, the stock market performs much better than average when Congress is not in session.
That at least is the finding of an academic study several years ago by professors Michael Ferguson of the University of Cincinnati and Hugh Douglas Witte of the University of Missouri at Columbia. Specifically, they found that "about 90% of the capital gains over the life of the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 9,033, -63.71, -0.70%) have come on days when Congress is out of session." (Click here to read their study.)
When I first read about the professors' finding of a so-called "Congressional Effect" in the stock market, I assumed that it was nothing more than 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.
But it turns out that the professors checked for this possibility. And they found that these other seasonal patterns account for only some, but not all, of this Congressional Effect. So they believe that there also is a genuine relationship between the stock market and whether Congress is in session.
This actually makes a certain amount of sense, they also argue: Companies and investors face "a more uncertain tax and regulatory environment" when Congress is in session. As confirmation of this finding, the professors point out that the stock market has tended to exhibit significantly greater volatility when Congress is meeting. And volatility is a good proxy for uncertainty.
To be sure, the Congressional Effect hasn't always prevailed: Stocks have not always performed well when Congress is on recess, just as they have not always produced poor returns when Congress is meeting. In trying to assess why it hasn't always worked, the professors found that the pattern has tended to be strongest when Congress has a low approval rating in public opinion polls.
How low must Congress' approval rating be in order for the Congressional Effect to be particularly worth betting on? The professors found it to be 39%. When it is below that level, then the Congressional Effect is more pronounced than when it is above that level.
What percentage of citizens currently disapprove of the job Congress is doing? PollingReport.com lists three polls that were conducted this past month that attempted to assess the public's opinion of the job Congress is doing, and the approval percentages in those polls ranged from 22% and 32%.
No wonder the stock market is struggling.
Maybe Will Roger got it right. The professors quote from a famous speech of his in 1930: "This country has come to feel the same when Congress is in session as we do when a baby gets hold of the hammer. It's just a question of how much damage he can do with it before we take it away from him."
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.