When Mr. Smith Goes to Washington, Sell!

In their March 2005 paper entitled “Congress and the Stock Market,” Michael Ferguson and Douglas Witte examine the relationship between stock market returns and the imminent quantity and the “quality” of Congressional activity using various stock indices over long periods. They find that:

• Depending on the index, daily returns are 1-4 basis points per day lower than average when Congress is in session and 5-14 basis points per day higher than average when it is not. Annualized returns are therefore 2%-6% higher when Congress is out of session.
• About 90% of the capital gains for the DJIA and two-thirds of the gains for broader averages have occurred on days Congress is out of session.
• Stock index volatility is lower when Congress is not in session.
• The higher the public disapproval rating for Congress, the better stocks perform and the lower the volatility while Congress is out of session.
• Stock returns are significantly lower when the Democrats hold a majority in Congress. Returns are significantly higher when a Democratic Congress is not in session than when a Republican Congress is not in session.

In summary, stock market returns and volatility reflect investor uncertainty regarding the likelihood and nature of Congressional activity. This effect is economically significant.

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