New Study Finds ‘Congressional Effect’ On US Stock Market

by Phillip Morton, Investors Offshore.com

01 July 2005

A new academic study has found evidence for a so-called "Congressional Effect" on the performance of the stock market.

According to research conducted by Profs. Michael F. Ferguson of the University of Cincinnati and Hugh Douglas Witte of the University of Missouri at Columbia, an astonishing 90% of the capital gains over the life of the Dow Jones Industrial Average were made during periods when Congress was out of session.

While there may be obvious seasonal factors at work in these results - Congress does not sit during holiday periods and it is well known in the investment industry that stock markets generally perform better immediately prior to these holidays - the professors argued that this could not account for all of the correlation, and they concluded that there is a genuine relationship between stock market performance and Congressional sessions.

The researchers surmised that a major factor behind this pattern is that investors face "a more uncertain tax and regulatory environment" when Congress is sitting.

They also noted that stock markets tended to be more volatile when lawmakers were in session, and seemed more likely to decline when public approval ratings for Congress were at their lowest. The professors observed that the Congressional Effect begins to kick in when the public disapproval rating rises above 39%.

The latest Gallup poll indicated that Congress has a disapproval rating of 59%. A recent Associated PRess/Ipsos poll has had it up as high as 64%.

Perhaps it's time Congress took a long summer vacation!

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