Timing the Market? Watch Congress

Wall Street's belief that national politics offers clues to timing the market is often frustrated. For instance, you might think stocks would do better under Republican presidents. Generally they do not.

What about a gridlocked Congress, such as we may enjoy next year? Nope. Since 1926, according to research cited by Jeff Sommer in the NY Times, during periods when neither party controlled the White House and both chambers of Congress, stocks returned about 7 percent annually. When one party was in full control, the annualized return was significantly higher: 12 percent.

Nevertheless, market timers have a good reason to keep an eye on Congress:

Oddly enough, while the data doesn’t support the idea that gridlock is beneficial, it does show that stocks fare better when Congress is out of session….

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The researchers found that more than 90 percent of the price gains over the 108-year life of the Dow Jones industrial average through 2006 came on days when Congress was out of session. And in periods when polls showed that Congress was least popular, this “Congressional effect” was most pronounced.

“Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.”

- Mark Twain, a Biography