Trade the Congressional Effect: How To Profit from Congress's Impact on the Stock Market

Summary

The Congressional Effect is the usually negative impact on the stock market that occurs when Congress considers legislation that may change the business model for a sector or even an individual company. Investors have to adjust their valuations to account for potential changes in business models. Since on most days Congress is considering some legislation, the Congressional Effect historically has occurred more often than not on a daily basis. From 1965 through 2011, the price of the S&P 500 Index rose at an annualized rate of less than 1 percent on days Congress was in session, but over 16 percent on days they were out of session.

I noticed this Congressional Effect as an investment banker in the 1990s when legislation capping the retail price of cable television service hurt that industry. Looking at the historical record, and considering the stock market impact of major legislation like the Smoot-Hawley Tariff Act, I launched a mutual fund seeking to take advantage of this data.

This book is designed to help you understand how the Congressional Effect works and what Congress's incentives are to continue it, and identifies sources that can be used to anticipate new sources of legislative risk. It also outlines ways that portfolios can be allocated to take advantage of the Congressional Effect and further protect your portfolio from ongoing legislative risk.