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Bad news: Congress to work harder

Posted by Richard on January 5, 2007

The Democrats have promised that the new Congress will work much harder than the previous one. No more three-day weeks, no more lengthy recesses. They want to be in session far more days and do far more legislating. Naturally, that sends shivvers down my libertarian spine. If there’s one thing I liked about having the Republicans in charge (and often, there was only one thing), it was that they didn’t get much done. To me, "Do-nothing Congress" isn’t a pejorative, it’s high praise.

According to Andrew Roth at the Club for Growth blog, it’s not just me and a few cranky libertarians that feel that way — it’s investors in general. Roth looked at 2006, comparing a dollar invested in the S&P 500 only on days when Congress was in session versus a dollar invested only when Congress was out of session. At the end of the year, the return on the former was 2.25%, and the return on the latter was 11.56%. The spread was even greater for the NASDAQ Composite Index: if you were invested only when Congress was in session, you lost 5.70%, but if you were invested only when Congress was out of session, you gained 8.19% — almost a 14-point spread.

Roth’s observation isn’t new or unique. He pointed to a nice column from last August by Amy Shlaes. She talked about Peter Singer, who first noticed the "Congressional effect" in 1991 and has now created a hedge fund dedicated to making money from it. Singer has long-term empirical data to back up his thesis:

Choosing the Standard & Poor’s 500 Index as his measure, Singer reviewed 40 years of stock data and government calendars. At least one chamber is in session for more than half of the 250-odd trading days of the year. Yet the index made a greater share of its price gains when Congress was in recess — at least two to three times greater per day.

Economists Michael Ferguson and Douglas Witte reviewed even more data over longer periods, and found the Congressional effect in four different indexes. It was especially pronounced — even flabbergasting — for the Dow Jones Industrial Average:

Since 1897, the year after the Dow was created, an impressive 90 percent of the gains came on days when Congress was out. Their charts show that a dollar invested in 1897 with the strategy of going back to cash every time Congress met was worth $216 by 2000.

But an 1897 dollar invested on the reverse strategy was worth only $2 after a century. The big gap between performances began to show up after World War I, when it became clear that Washington would play a bigger role in the country.

For both philosophical reasons and down-to-earth, bread-and-butter economic reasons, I hope Pelosi’s and Hoyer’s promises of long hours and five-day work weeks turn out to be meaningless posturing, just like their promised "ethics reforms."

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