Your Money: A novel approach to politicians, markets

"Trade the Congressional Effect," by Eric T. Singer.
"Trade the Congressional Effect," by Eric T. Singer.
Posted: October 17, 2012

Bearish or bullish on politicians? With the looming fiscal cliff of scheduled tax and budgetary changes and lawmakers' inability to put their necks on the line and make tough decisions, investors are intensely watching the approach of the Nov. 6 elections.

Keying off of investors' anxiety is Eric T. Singer, who manages the Congressional Effect Fund (symbol: CEFFX). His investment philosophy for this mutual fund is a novel one: to sidestep Congress altogether and invest only on the days when the House and Senate are not in session. Singer argues that lawmakers do more harm than good for the markets.

His new book, Trade the Congressional Effect: How to Profit from Congress' Impact on the Stock Market, claims that Congress hurts the portfolios of almost every American. When Congress is in session, there is a negative effect on equities markets, according to Singer. He cites the following statistics:

From 1965 through 2011, based on the typical 256 days of trading each year, on the 7,900 days that Congress was in session, the stock market went up in price less than 1 percent on an annualized basis.

During the same period, on the 4,100 days that Congress was in recess or on vacation, the stock market went up more than 16 percent annualized.

Statistically, the data are identical going back to 1897 day-by-day.

One dollar invested only on Congress-in-session days from 1897 through 2011 would have compounded by price action into just $2. And a $1 invested just on congressional vacation days would have compounded into more than $300 in 115 years.

The back-testing is interesting - if you're a political junkie - but the underlying fund is gimmicky and not a good investment. Stay away.

The Congressional Effect Fund is a high-fee fund for a reason: It trades heavily in S&P 500 futures and exchange-traded funds, had a 400 percent annual turnover rate (that means the manager bought and sold the entire portfolio four times over in one year!), and carries a one-star rating from Morningstar.

According to the Congressional Effect Fund's April 2012 prospectus, which you can review on the Securities and Exchange Commission website ( www.sec.gov), the mutual fund lost 2.8 percent after taxes in 2011. The S&P 500 was up 2.1 percent the same period. So despite the sales pitch, the fund isn't even beating its own index. Have fun with the joke on Congress, but steer clear of this fund as an investor.

Taxes and election

The Grant Thornton L.L.P. office in Philadelphia sent along a terrific comparison showing the differences between presidential candidates' platforms and positions on taxes-capital gains, dividends, etc.

You can get to it on its website ( www.grantthornton.com). On the righthand side, click on the "Tax," tab and you can select the white paper and charts, titled "Tax policy outlook for the presidential election."

Markets and elections

A new study by MFS Investment Management details the history of the blue chips in the full year following a presidential election year, in the period from 1900-2008.

It notes that the Dow Jones Industrial Average has, on average, lost 4.4 percent in the year following a presidential election in which the incumbent party in the White House loses. On the other hand, in years when the incumbent wins, the Dow gained an average of 15.1 percent the following year, no matter the party.

In the period 1961-2010, MFS reports, in years when the same party wins control of the White House and Congress, the S&P 500 index the following year returned 12.1 percent, on average.

In years when a Democrat was president and Republicans gained control of Congress, the S&P returned an average of 21.3 percent. In years when a Republican president wins but Congress ends up controlled by Democrats, the annual return of the index the following year was up 4.5 percent. In the years that followed a presidential election year in which one party controlled the Senate and another controlled the House - regardless of who was president - the S&P returned 7.1 percent, on average.


Erin Arvedlund is a finance reporter and a resident of Philadelphia. Contact her at erinarvedlund@yahoo.com or 646-797-0759.

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