Congress to Do Nothing Until After the November Elections. Good News or Bad?

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Is Congress bad for business? Probably. Pending legislation, politicians' use of class warfare, demonizing industy sectors can have a bad effect on job creation, economic growth.

This is good news: Congress will be doing nothing until after the November election—at best. According to Slate’s blog, in action isn’t good for the economy. I don’t know. Uncertainty over legislation and taxes certainly isn’t good for business, but a money manager I know has done research that he says proves that stocks go up when Congress is not in session and goes down on days Congress is in session.

The manager, Eric Singer, used to run the Congressional Effect fund. Not sure his idea caught on with the investors, but it was an interesting idea. Here is what we said in an articlea few years ago:

Back in 1993,the pharmaceutical and health care industries were under pressure. It wasn't that fundamental business trends were off. It was that the newly installed Clinton Administration and its allies in Congress were attacking the industry for “shocking” prices (President Clinton, February 1993) and overly favorable tax treatments (Senator David Pryor, D-Ark.).

Also in February of that year, Senator Pryor introduced legislation to repeal federal tax exemptions for profits made from business operations in Puerto Rico, where many pharma companies have units. And, at that time, it looked as though Hillary Clinton's health care task force would deliver a “socialized” health plan to Congress by May 1.

No wonder that drug stocks had tanked, “with many 25 percent to 40 percent off their all-time highs reached in 1991 and early 1992,” according to a Feb. 22, 1993, Financial Times story, which noted that “upwards of $100 billion in drug stock-market capitalization had been wiped out” in just the preceding 12 months.

This is exhibit A in one of hedge fund manager Eric Singer's market philosophies: He doesn't like to be long equities when the United States Congress is in session because, he says, Congressional lawmakers are a significant impediment to investment returns. Singer began looking into his theory in 1991. “I noticed that year that equities typically did better when Congress was in recess,” he says.

 

 Here is an excerpt from Slate today:

After a five-week recess and lots of important tasks to attend to, lawmakers will get right back to work on the key issues when they return to Capitol Hill today, right? Eh, probably not. In fact, lawmakers are unlikely to stay very long in Washington in the first place. They’re expected to be in Washington for only about two weeks between now and Election Day in November, “making their return to the capital little more than a pit stop,” notes Reuters. So, what will they do about the important issues? Why, punt, of course. With less than two months to go until November 6, members of Congress will likely simply push to do the bare minimum to prevent a government shutdown when the budget year ends on Sept. 30, points out the Associated Press.

It seems lawmakers are getting ready to postpone even the biggest of decisions, including the much-hyped “fiscal cliff” on taxes and spending, reports Politico. Failing to take action on the issue could very well trigger a recession early next year, yet action seems highly unlikely until after the election. Part of the problem though is that business cycles don’t always follow political ones, and some corporate leaders have already warned the uncertainty over the issue is already affecting key decisions, points out Reuters.

 

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