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The story below (apparently from the Washington Post) was posted to RT back
on May 20, 1997.
Wall Street Students Enjoy a Good Recess
By James K. Glassman
Sunday, May 18 1997; Page H01
Congress is scheduled to leave Washington on Thursday for what has come to
be known euphemistically as a "district work period" -- that is, a recess or
Memorial Day vacation. Investors, pay heed. According to newly published
academic research, this could be one of the best times to put your money in
the stock market.
"Almost the entire advance in the market since 1897," the researchers
conclude, "corresponds to periods when Congress is in recess. This is an
impressive result, given that Congress is in recess about half as long as in
session."
Impressive? Later in their report, the researchers call the results
"amazing" -- a more accurate adjective. For decades, analysts have been
studying the effects of seasonality -- that is, the external influence of
the calendar -- on stocks. But, until now, no one has seen such a direct,
simple and long-term connection between the congressional calendar and the
market.
Over the 96-year period that was studied, 89 percent of the gains in the Dow
Jones industrial average occurred when the House of Representatives was out
of session and only 11 percent when it was in session.
Or, to put it another way, on the average day that the House was out, the
Dow rose 0.054 percent, or roughly 4 points (based on the Dow's current
level). On the average day that the House was in, the Dow rose only 0.004
percent, or about one-quarter of a point on the Dow.
The researchers also looked at more current history. They found that between
1984 and 1993, the Dow rose a total of 326 points on days when the House was
open and 2,347 points when the House was closed. The Dow rose more than
seven times as much during the closed periods -- even though the House was
open nearly twice as long as it was closed.
The research -- by Reinhold P. Lamb and William F. Kennedy of the University
of North Carolina at Charlotte; K.C. Ma of KCM Asset Management Group in
Wilmette, Ill.; and R. Daniel Pace of the University of West Florida -- was
published in the latest edition of the Financial Services Review, the
Journal of Individual Financial Management (c/o JAI Press Inc., Box 1678,
Greenwich, Conn. 06836).
So, why does the market love it when Congress is out of town? Lamb et al.
can only guess.
"Perhaps," they write, the poor behavior of stocks while the House is in
session "is due to the uncertainty generated while Congress is debating
policy, regulatory and procedural issues. . . .
"On the other hand, when Congress is in recess, no bills and regulatory
matters are being formally debated or formulated. Perhaps the market enjoys
the temporary certainty exhibited by the absence of congressional decisions,
and responds with positive movements."
Perhaps, perhaps. Then again, some of the effects of seasonality simply
can't be explained at all. You just have to take them -- or leave them -- at
face value. Here are some of my favorites:
Monday is by far the worst day of the week for the market. Since 1952, the
average Monday has produced a negative return (though lately, Mondays are
getting better). Every other day of the week, the market is up more than
it's down. Friday is best, up 57 percent of the time (vs. 46 percent for
Monday).
The last four days of the current month plus the first day of the next
month comprise the market's best period. "While the market has risen on
average 52.4 percent of the time, the prime five days have risen 56.4
percent," writes Yale Hirsch in the Stock Trader's Almanac (201-767-4100), a
compendium of many seasonality phenomena.
December and January are the best two months for the stock market while
September is the only month that shows a loss.
Congress buffs realize that the House is usually out of session for most of
December and January and back in session for September. The authors of the
recess study, however, discount the importance of monthly seasonality on
their results. They perform a regression analysis, controlling for the
"January effect," and conclude that it "is not significant"; congressional
recess is.
Since Andrew Jackson (1832), the election year and the year just before it
have produced stock market returns that are more than seven times as great
as during the other two years of the election cycle.
The worst year in the cycle comes just after an election (that is, a year
like 1997). Since 1832, such years have produced 22 losses and 19 gains, for
an aggregate loss of 3 percent. In the year before an election, the market
has had 28 gains and just 13 losses, for an aggregate return of 295 percent.
The worst year of the decade -- by far -- is the seventh. Since 1885,
according to Hirsch, the market has declined eight out of 11 times in years
ending in "7." By contrast, the market has never lost ground in a year
ending in "5."
This year, therefore, gets a double-whammy. The Standard & Poor's 500-stock
index has produced double-digit losses in each of the last five
post-election years ending in a "7." Average loss: 20 percent. So far in
1997, the S&P is up 13 percent. Could a loss of 30 percent or more for the
last 6 1/2 months of this year be inevitable?
These numbers are endlessly fascinating, but the question is whether to take
them seriously when investing. I have two rules:
The simple fact that a system, or a seasonal phenomenon, has racked up
impressive returns in the past is not enough. It has to make rational sense
as well. Very few systems meet this test.
With a good database, I could devise a formula that, when back-tested (that
is, applied to historical performance), works spectacularly well.
For instance, I could select a portfolio that includes the 33rd, 66th, 99th
stock (and so on) on the alphabetical list of New York Stock Exchange
companies that appears in The Post every day. Then I could check this "33n
portfolio" against real results going back 20 years. Let's say it returns an
annual average of 9.5 percent. That's not too good, so I'll try a portfolio
of the 34th, 68th, 102nd, etc., stocks. Through trial and error, there's no
doubt I can find a formula that has significantly beaten the market as a
whole.
But would I invest in such a portfolio for the future? Of course not. Its
basis is just a silly little random device, with no reasonable basis.
This is my impression of most seasonality effects. Certainly, there is no
decent explanation for a year ending in "7" being worse than a year ending
in "5." Election cycles? Maybe. The argument is that incumbents try to goose
up the economy in the year of an election and the year just before, through
increased spending and perhaps tax cuts. But, then, wouldn't the market be
wary that such moves would lead to an overheated economy and higher interest
rates in the future?
I've said in the past that the Dow 10 theory makes sense since it selects
the highest-dividend stocks out of the sturdy 30 companies in the Dow Jones
industrial average. A high dividend yield often indicates that a stock is
undervalued, so the Dow 10 (or "Dogs of the Dow") is a value-stock play,
which, academic research shows, beats the market over time.
Even if seasonal effects exist, prudent stock market investors generally
should ignore them since such investors buy and hold stocks for the long
term -- that is, through seasons.
The two most important facts that any investor needs to understand are that,
over the past 70 years, stocks have returned an annual average of 10.5
percent and that, when held for 10 years or more, stocks aren't much more
risky than bonds or even Treasury bills.
Recognizing that the market makes nearly all of that 10.5 percent gain when
Congress is out of session is nice to know, but it's irrelevant to earning
an overall 10.5 percent.
If you want to take a chance by continually switching, with congressional
peregrinations, in order to earn more, then be my guest. Just recognize that
you'll incur capital gains, brokerage commissions and heartburn. Call me
stodgy, but while the "Congress effect" is amusing and even instructive,
it's not going to guide my investing.
If I had a big chunk of dough to commit to the market, maybe -- in light of
the new research -- I'd wait until Congress adjourns this fall (target date:
Nov. 14).
Come to think of it, by then we'll nearly be out of this scary year that
comes after an election and ends in a "7."
Copyright © 1997 The Washington Post Company
JW
-----Original Message-----
From: ROBERT ROESKE [mailto:bobrabcd@xxxxxxxxxxxxx]
Sent: Tuesday, November 09, 1999 10:17 AM
To: realtraders
Cc: realtraders@xxxxxxxxxxxxx
Subject: RT_Gen - congressional indicator
Does anyone have statistics on the congressional recess indicator. Folklore
has it that the market does better when congress is on recess.
BobR
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