MW The House is taking a summer break - and now the stock market can get to work

By Mark Hulbert

The Dow and the S&P 500 post strong gains when Congress is out of session

Last Tuesday, House Speaker Mike Johnson unexpectedly adjourned the U.S. House of Representatives until September. The next day, the S&P 500 SPX hit another all-time high.

Coincidence? Several academic studies suggest not. That's because the stock market historically has performed better when Congress is out of session.

One such study was conducted by Michael Ferguson, head of the department of finance at the University of Cincinnati's Carl Lindner College of Business, and Douglas Witte, a professor of finance, economics and risk management at Missouri State University's business school.

In their study, titled "Congress and the Stock Market," they found that the Dow Jones Industrial Average DJIA from 1897 through 2004 produced the equivalent of a 13.8% annualized return when Congress was not in session, versus 2% when Congress was in session. They found a similar result for the period beginning in 1957, when the S&P 500 was created.

Another study, which in effect constitutes an out-of-sample test of this result, focused on the Australian stock market from mid-1993 through late 2011. In a paper entitled "The Effects of Political Uncertainty on Stock Prices," the study's authors at the University of Melbourne (Yoni Cukierman, Asjeet Lamba and Carsten Murawski) found that "returns in the Australian stock market are lower and more volatile whenever the Australian federal parliament is in session."

This year constitutes another out-of-sample test. Since the beginning of the year, as you can see from the chart above, the S&P 500 has produced far better average returns when Congress was not in session than when it was. Though these year-to-date results are not statistically significant in and of themselves, they corroborate the two studies referenced above.

Though we can only speculate as to why the stock market performs better when Congress is in recess, most hypotheses trace to the economic and political uncertainty that exists when Congress is in session. As humorist Will Rogers famously wrote a century ago in a letter to the editor of the New York Times: "This country has come to feel the same when Congress is in session as we do when a baby gets hold of a hammer. It's just a question of how much damage he can do with it before we take it away from him."

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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