TRUCKEE, Calif. - It is well known that there is a relationship between politics and economics, and of course there is a strong relationship between economics and the market. Mark Twain may have said it best when he stated, "No man's life, liberty, or property is safe while Congress is in session."There have been numerous studies on the effects of politics and stock market returns. They have yielded some interesting results.One study is the effect that congress has on the market. It covers 46 years, from 1965 to 2011, and found that the annualized return for the S&P 500 was +0.72 percent while Congress was in session and +16.60 percent while Congress was on vacation. Over a nine-year period from 2002 to 2011 the returns were -6.49 percent while Congress was in session and +14.80 percent while Congress was on vacation.The way the study works was pretty simple - it measured market performance while our congressional leaders were working and the market performance for the times that they were away. They discovered that the market does much better when Congress is on vacation.The reason the market performs better during vacations is that Congress can pass laws that will impact specific industries or the market as a whole. Automobile mileage requirements can impact auto stocks. Health care legislation can impact pharmaceutical companies, health insurers and for profit hospitals. The recent fiscal cliff negotiations had the market bouncing around until a deal was finally announced. Some investors even use a money management strategy that invests when congress is away and moves to cash when congress is in session.Another well known political effect on the market is the presidential election cycle. This has been analyzed over the years by some very respectable academics. The conclusion is that the stock market has a tendency to perform better in the third and fourth years of a president's term than in the first and second years of their term.The reasoning behind this is that the president will enact economic policy in their first year or two and it can take a couple of years for the results to be seen. Of course 2008 was an exception where the market declined dramatically in the last year of Bush's second term. The 2008 crisis was a real market and economic anomaly.Going back to 1953 an investor would have received much better returns by being in the market only during last two years of a president's term and sitting out the first two.Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at his blog at www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
January 28, 2013 | Back to: News