Monday, October 07, 2013

The Congressional Impact On Equity Prices

In a study by Michael F. Ferguson of the University of Cincinnati and H. Douglas Witte of The University of Missouri (Missouri State University) titled Congress and the Stock Market, they show a relationship between the return for the Dow Jones Industrial Average based on whether Congress is in or out of session. They call this the "Congressional Effect. They study notes,
"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. The Effect varies systematically with the public's opinion of Congress: returns are lower and volatility higher when a relatively unpopular Congress is active. Public opinion appears to play a fundamental role in market prices. This is consistent with a mood-based explanation that sees Congress as ‘depressing’ the average investor. Alternatively, our results can also be reconciled with rational explanations that view Congressional activity as a proxy for regulatory uncertainty or rent-seeking behavior."
The below chart contained in the Ferguson and Witte study displays the return history of the Dow Jones Industrial Average going back to 1897,
From The Blog of HORAN Capital Advisors
"The 'Out-of-Session' strategy is the cumulative return to a strategy that invests $1 in the DJIA on days Congress is not in session and in cash (earning 1 basis point per day) when Congress is in session. Conversely, the 'In-Session' strategy invests in the market index on days Congress is in session and in cash on days Congress is out of session."
H/T: 361 Capital

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