Call Your Broker, Congress Has Left Washington For Vacation New Study Shows Market Gains Closely Track Exodus

Congress left Washington Friday 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. For example:

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.

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.” 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?

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, beware. Just recognize that you’ll incur capital gains, brokerage commissions and heartburn.