Saturday, January 05, 2008

 

The Congressional Effect

Uncertainty rises while Congress is in session

With predictable results for investors. From the abstract of a paper written by University of Cincinatti's Michael F. Ferguson and the University of Missouri's Hugh Douglas Witte:
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.
Via Will Franklin, who graphically compares the return one would have gotten investing only while Congress was in or out of session over 100 years. Very interesting. Here's a look at 2007 results. Quite shocking.

He also observes:
Meanwhile, back in Austin, Texas, the state legislature meets in 2007 for its first regular session since 2005, as Texas' booming economy and population growth both continue to outpace the strong national economy and population growth overall.

Other states-- mostly of the "red" variety-- share Texas' infrequent legislative schedule and enjoy similar results. Fewer, shorter legislative sessions are abhorred by those who would like to see "more results" from their elected representatives and by those who directly depend on active legislatures for their livelihoods, but shorter sessions are the ultimate term limit. These session-shortening rules, typically mandated by state constitutions, are a built-in pro-growth provision that gives "term-limited" states a leg up in the competition for commerce, industry, and people.
Via Tigerhawk.

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