A major investment risk: Congress at work
When Congress is in session, stock prices tend to stall or fall. When Congress is out of session, they tend to soar.
How much money did you lose last year? If you're like most Americans, your retirement funds, college savings accounts, and any other investments tied to stocks suffered greatly.Skip to next paragraph
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It didn't have to be this way. You could have followed a simple investment rule that would have spared you from much of the past year's losses.
You could have invested only when Congress is on vacation. It may sound a little crazy, but I am totally serious. When Congress works – and by "works" I mean "meddles" – it destroys wealth. When Congress doesn't work, wealth grows by itself.
From 1965 through 2008, looking at a total of 11,000 trading days, the annualized daily price gain of the S&P 500 Index is just 0.31 percent when Congress is in session. Out of session, that figure jumps to 16.15 percent, a daily difference of 50 times.
As government power and influence grow, the trend has intensified in recent years. From 2000 through 2008, in-session performance of the S&P is –12.4 percent. The out-of-session performance: +8.8 percent.
In other words, had you invested $10,000 only when Congress was in session from the beginning of 2000 through 2008, putting aside dividends, you'd have $4,615 today. Had you invested that same $10,000 only on days when Congress was on vacation, you'd have $13,416 today.
The reason for this is that the biggest risk in the market is the political risk that Congress will change the rules for many industries – and keep changing or threatening to change them.
Investors face enough risk as it is. They don't like added uncertainty. Political "reform" – or even just the prospect of it – adds a great deal of uncertainty and thus depresses stock prices. Doctors are told: "First, do no harm." Members of Congress seem to follow a different injunction: "First, do something. Worry about consequences later."
Imagine you are playing center field in a baseball game. In the middle of the second inning, the umpire announces that from now on, it takes five strikes for an out, and three balls for a walk.
The batters relax, and wait for a really good pitch to hit, with the result that there is 12-run rally in that inning by your opponents.
Finally, your side gets up to bat and your turn at the plate comes. The umpire turns to you and says, "You know, it's the second half of the second inning, so you'll be getting two strikes for an out, and seven balls before you are walked." You strike out. As does your team.
The score is 12–0 going into the third inning. The umpire goes into the dugout of the other side, huddles, emerges, and announces the game is being called on account of rain. The sky is completely blue.
You go to the commissioner of baseball to have the game canceled and replayed with the same rules for both sides. He tells you that the game is complete for purposes of the pennant race, but you can have a committee hold hearings after the World Series to determine what might have gone wrong.
This is pretty much what has been happening to investors with greater and greater intensity in recent years.
Once upon a time, we had a universal concept of bankruptcy. If AIG or Lehman Brothers or Washington Mutual or General Motors could not meet their obligations, they could go into bankruptcy, conservatorship, or receivership, where the bondholders could have a fair fight with the shareholders, employees, vendors, and others to determine who gets what according to well-settled rules. It was clear: three strikes, four balls, three outs, nine innings.