Congressional Effect

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

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NEW YORK SUN CONTRIBUTOR

It’s always hard on the day after an election to know exactly what impact the election will have on the economy. Still, there are some things of which we can be sure. The first is that the market believes that the government that governs least governs best. That does not, however, necessarily mean that the market wants all Republican rule. Republicans can do as much as Democrats to expand government, particularly when they get accustomed to power. When the parties totally agree on a law, such as the Sarbanes-Oxley act, for which 97 senators voting in favor, it is more likely than not that the unintended consequences of such a law will result in terrible market displacements. Such has happened in the case of “Sarbox,” as the law is known, which has affected the competitiveness of the American market for initial public offerings.

What the market prefers is a government that is quite literally on holiday. A split government, with the Hill dominated by one party and the White House by another can be good. A Congress where the House is Democratic and the Senate is Republican is also not bad. That’s because when different parties control the presidency, the House, and the Senate, the risk of “damage” seems, to the market, to be less. Bond market people like to say that the optimal environment for investment is a “Goldilocks economy,” growing not too fast, and not too slow. A national capital where Democrats rule in some areas and Republicans in others is the political equivalent of a Goldilocks Washington.

Consider the record, as based on the Standard and Poor’s 500. Markets have shown an important pattern. They tend to go up when Congress is least likely to do damage — when lawmakers are on recess.

Over the years, I’ve tracked the numbers. Since 1965, the market has gone up about four times as much each day Congress is on vacation (.0008% price increase), than when the lawmakers are at work (.0002%). In some quarters, there have been cries against having a “Do Nothing” Congress, calling for increased attendance. It has been bruited about that Congress is working too little, taking too much time out to raise money at home with constituents and others. If only they would do nothing! And promise it! And deliver! The data from the past suggests that a stock market with daily returns not impeded by Congress could easily return over 20% annually. Some observers have called the phenomenon I write about the Congressional Effect.

It was with this in mind, that a few weeks ago, when I had the chance to meet President Bush for the briefest moment, I had advice to offer: “Whether you have a Republican or Democratic Congress, you ought to encourage them to take as much vacation as possible — you know it’s been shown the stock market goes up more when they are out.” His response was cogent: “You know I always intuitively knew that, but I’m glad it’s been shown.”

I didn’t get to delve into things more deeply with the president, but the past record on gridlock is also worth reviewing. The long-term total return of the S&P has been roughly 10% since 1965. When Congress has been split, the S&P has returned over 15%. For example, the early Reagan years, especially 1982 through 1986, were wonderful for markets, and had a split Congress.

The extent to which the market has been anticipating a split Congress may partially explain the market’s 10% rally since the summer. Moreover, over the last 40 years, at the times when both houses of Congress and the president were of the same party, the market underperformed.

Of course life is not entirely simple. There are good kinds of gridlock and bad kinds. When the gridlock is of a narrow variety, then the market is happy. An example would be when the Republicans shut down the government in November 1995 for a week. Then the market rallied 1%. The nation grasped that it could do better without Washington (I do recall a cartoon with a banner titled “Welcome Back Non-Essential Workers.”) Another example of benign gridlock came later. When Congress was preoccupied with impeachment hearings and passed no significant legislation in 1998, the market extended what had already been a fabulous rally.

But there is also bad gridlock, when uncertainties outweigh benefits. In 2000 following the election, constitutional questions were suddenly at issue. The market likes paralysis that is imposed by the will of the people, not through decisions by judges. That late autumn the market sold off as much as 10%, one its steepest monthly declines ever. Part of the problem was the perception of the election — that there was widespread voter fraud and litigation gamesmanship.

What about this time? There will be some close outcomes. Will the lawyers make us whole if the market goes down 10% while we are waiting a needless two months to see which congressmen are seated? It is reasonably foreseeable that extended election litigation will negatively impact the wealth of our nation. Should the political parties and their lawyers have to post bond before subjecting the public to lost wealth? Why should we suffer an extended period of litigation-induced uncertainty, with its ill effects on the markets? Judicially imposed gridlock frustrates the will of the people. Baseball has it right: The ump’s call is final, get on with the game. For the sake of the country, I hope that those who know they should go will go quickly and gracefully, and recognize that there are larger costs to endless partisanship.

Mr. Singer is general partner in the Singer Congressional Fund.

NY Sun
NEW YORK SUN CONTRIBUTOR

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.


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