Is Congress Ruining Your Stock Performance?

Some new stock research may confirm the worst fears anyone who is sick of Congress and its partisan bickering, gridlock and pandering.

The Congressional Effect Fund is a mutual fund that tries to capitalize on the influence Congress has over stock performance. According to the fund's investment manager, Eric T. Singer, the numbers show that Congress has had a severely dampening effect on stocks over the long run.

According to Singer's figures, from 1965 through 2011 Congress was in session for 7,900 days, and on recess for 4,100 days. During the days when Congress was in session, stock prices gained an annualized average of 0.72 percent. During the days when Congress was out of session, stock prices gained an annualized average of 16.60 percent.

In other words, stocks were much better off without Congress than with it.

But can the past predict the future?

Now, this is not a positive or negative recommendation of the Congressional Effect Fund. It's one thing to identify an interesting market relationship, but it can be much more difficult to successfully exploit it as an investor. Still, the concept behind the fund raises some good topics for investors to consider:
  1. Backfits do not make good investment models. A backfit is when you base an investment strategy entirely on past patterns of market performance, expecting those same patterns to repeat themselves in the future. To the Congressional Effect Fund's credit, its investment approach does not seem to be entirely based on a backward-looking model, and that's just as well. The past is a valuable guide to investing, but it typically does not repeat itself in an orderly manner.
  2. Markets are anticipatory. One thing that makes it tough to profit from past patterns of market performance is that once they become known, markets anticipate them and start to move in advance of the expected effect. This also means that you can't entirely attribute performance during in-session days to Congress -- markets are usually thinking ahead of that day's events.
  3. Sometimes, Congress has a tough job. Congress has a number of problems, but sometimes it has to do the dirty work, either by meeting to deal with an emergency or addressing an issue the markets would rather ignore. In other words, sometimes Congress can be the focal point of bad news that is not entirely of its own making.
  4. For all the caveats, the data is compelling. While the above three points are important qualifications to think about when viewing the data presented by the Congressional Effect Fund, the numbers they present are still compelling, simply because they cover so much time and show such a wide performance differential.
  5. Specialty funds can be tough to fit into a portfolio. Where do highly specialized funds like the Congressional Effect Fund fit into a standard portfolio? That can be the problem. Perhaps funds like this could represent a small portion of your stock allocation if you have a large enough portfolio to make some specialized investments, or perhaps you might feel good about this investment as a type of hedge if you are deeply concerned about the behavior of Congress.

All things considered, the numbers put together by the Congressional Effect Fund may lead you to ask some important questions about your portfolio -- or at least, some pointed questions about Congress.