LEGISLATOR GO HOME!
(March 2, 1992 Barron's)
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BEFORE the Super Bowl, a friend asked if I was concerned about the market because it looked as if the Buffalo Bills might win, thus activating the curse that afflicts the stock market whenever a former American Football League team is victorious.

I told him not to worry, because even if the Bills did triumph (silly idea, as it turned out), the January Effect would almost certainly bail us out and, if that didn't work, the Summer Rally or the Thanksgiving Rally or the Santa Claus Rally would definitely do the trick.

All of which got me thinking. In physics, scientists are always searching for a universal theory. Is there something universal about the stock market's rallies?

And then it struck me: Maybe the one thing all these periods have in common is that Congress is usually out of session when the various effects weave their magic.

Just for kicks, I looked at how the S&P 500 (without taking dividends into account) performed on a daily basis over the past year whenever the Senate was shut. Allowing for some nuances of taking daily averages, the S&P was up about ..00012% when the Senate was open and .0025% when it was closed, a difference on the order of 20 times! Moreover, the Senate was open twice as much as it was closed, so most of the gain for the year occurred only when the Senate was closed.

This seemed too good to be true. Certainly, 1991 must be an aberration. And maybe using the Senate alone was misleading. So, I did more research.

From 1987 through 1991, the S&P 500 rose about .0010% on business days when Congress was closed; and just about .0002% when the legislators were in action. Now, this was a more modest difference, but not much, i.e., still up there with the Summer Rally, and for sure the Super Bowl Indicator. After all, the market rose five times as fast when Congress stayed home. I thought, "Hey, this is something Marty Zweig and his pals would like to know."

When I discussed this phenomenon with my personal congressional Deep Throat, he laughed and said, "But you haven't looked at the risk-adjusted returns. Think of the risk people take when Congress isn't there to care for them."

But when I did think about it, the numbers showed that Deep Throat was wrong.

It turns out that the market not only went up more when Congress was closed during the past five years, but that it also was much less volatile. The standard deviation of returns was significantly greater when Congress was open than when it was closed.

Let's put this into perspective. If, say, stock A pays twice as much as stock B, and has a greater certainty of returns, you'd probably pay a lot more for stock A, right? Which suggests that the stock market would go up a lot more and be a safer place if the members of Congress would simply have the good sense to stay home.

For a final check, I went back 15 years, to the last three years of the Carter Administration. (Why didn't I go back further? Because that was all the data I could buy cheaply. Besides, most of the people running the market these days can't remember that far back anyway.)

Once more, the relationships held, with the S&P 500 up a daily average of .00036% when Congress was open, vs. .00066% when Congress was out of town.

Finally, a brief examination of the numbers shows that the stock market was at its worst when only the House was open. For example, over the past five years, when just the House was in session and the Senate was closed, the market actually lost money. Maybe those folks are working overtime just to cause trouble. At the very least, they remind me of the father in Samuel Butler's The Way of All Flesh. As you may recall, the father's sole pleasure in life was adding his son to his will every morning just so he could publicly cut him out of the will at dinner.

If the numbers I'm looking at are right, our nation earns less on its equity when Congress is open, and much of its returns when Congress is closed. We all know the evil 'Eighties plunged the country into too much debt, and took away too much equity. Now, if that equity was higher, we'd all be better off. If Congress stayed home, we'd have calmer markets with improved chances for higher returns and higher stock prices.

It was said of the Connecticut legislature 200 years ago that "no man's property is safe while they're in session." The Founding Fathers apparently felt much the same thing about lawmakers in general, summed up in the statement: "That government governs best that governs least."

Now the only way to get our national legislators to stay home is to make it worth their while. Right now, they keep on showing up, day after day, just to perform constituent services and otherwise pork that barrel. But they are responsive to economics; just try getting them to accept a real pay cut!

So, let's strike a deal: If Congress stays home, let's pay them a big bonus, maybe keyed to a percentage of the profits they'd create just by not doing anything. In other words, let's reward them for sitting on their hands, an activity they've shown a supreme talent for anyway.

As they say in the Army: Lead, follow or get out of the way.

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