Lame Duck Congress Bodes Poorly for Stocks

BOSTON (TheStreet) -- Investors say political gridlock stemming from an energized Republican Party will bode well for the stock market.

Eric Singer, manager of the Congressional Effect Fund (CEFFX), isn't among them.

With the GOP capturing the House, the two-month lame duck session will be "incredibly dangerous" for investors, the mutual fund manager says.

"As we've had more political volatility, it has translated to less and less certainty as to how a particular piece of legislation could play out," Singer says. "The public is extremely skeptical."

While Democrat incumbents Barney Frank and Harry Reid managed to hold on to their seats in the House and Senate, respectively, several Republicans, including Arkansas' John Boozman and Wisconsin's Ron Johnson, were able to wrest control from lame duck Democrats. Newly elected leaders begin the next session Jan. 3, leaving current members less than two months to tackle key unresolved issues.

The 111th U.S. Congress and its Democratic majority made wide-reaching policy decisions, including an overhaul of the U.S. health-care system and reform of the financial industry. However, neither the House nor the Senate has yet to pass a budget. It is also uncertain whether those departing Capitol Hill will move to stop the expiration of the Bush tax cuts or if Congress will take up cap-and-trade legislation, both of which are hotly contested.

The previous lame duck session occurred in 2004 after Republicans increased their majority in both chambers, and that was a boon for investors. From that year's election on Nov. 2 through the end of 2004, the Dow Jones Industrial Average rose 8% and the S&P 500 gained 7%. Singer doesn't expect the same result this time around.

"It may turn out that the lame duck session is a whimper, but I doubt it," he says. "There is a very interesting chance that after an extraordinary election, the guys who are still in office won't just go away. If I were an investor, I'd be very concerned about my political risk during the lame duck session. There is a relentless amount of uncertainty that is created by the presence of legislation."

As manager of the Congressional Effect Fund, Singer seeks to capture the historically higher returns on out-of-session days and avoid political risks when the House and Senate are in session. It is the first mutual fund that explicitly attempts to minimize exposure to the potentially negative effect of Congressional legislation.

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