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. He wrote a tongue-in-cheek op-ed story for Barron's a year later suggesting there was more to the fabled stock rallies that occurred in summer and around holidays than simple seasonal cycle.
Singer, a Libertarian-leaning former investment banker with more than 20 years experience covering small-cap stocks, runs the Singer Congressional Fund (SCF), the strategy of which is based on a unique theory: that the markets do significantly better on the days when our Congressional lawmakers are on vacation. For example, August is a good time to be long stocks, and so is the end of October, Singer says. Singer buys stock indexes, individual small-cap stocks and derivatives; but, he is out of the market (or has significantly reduced positions) when Congress is in session.
Talk Is Not Cheap
“Basically, whenever a new law is proposed it has a price. And that price is usually regulation that affects one industry or another,” says Singer. Even if there is no new regulation on the table, the mere prospect of it is unsettling for the markets. In short, says Singer, “talk isn't cheap.” He uses the example of 1990, when cable television companies rates were capped (repealed in 1996). Singer says cable companies like Comcast, Time Warner and Cablevision dramatically underperformed other sectors over that time period. And, of course, he mentions the “Hillary Effect” — Hillary Clinton's early 1990s health care task force, which, as noted earlier, played havoc with health care issues. Singer points to Sarbanes-Oxley as the perfect contemporary representation of a wealth-diminishing regulation.
Making connections between stock prices and government activity certainly isn't an entirely new idea. In fact, economists Michael Ferguson of the University of Cincinnati and Hugh Douglas Witte of the University of Missouri at Columbia have reviewed the affects of government on the stocks of four indexes: the Dow Jones Industrial Average, the S&P 500, the Center for Research in Security Prices (CRSP) value-weighted index and the CRSP equal-weighted index. Their results jibe with what Singer has found. Since 1897, the year after the Dow was created, an impressive 90 percent of gains came on days when Congress was out. Their charts show that a dollar invested in 1897 that was converted to cash every time Congress met was worth $216 by 2000. The opposite strategy — investing only when they were in session — only got you $2 by 2000.
There are others, too, who speak about the “Congressional effect” on the markets. The Hirsch Organization's Stock Trader's Almanac has been in circulation for 39 years and has endless amounts of back-tested data relating to presidential and Congressional elections and other cyclical events that influence moves in the stock market. Indeed, Judd Brown, an analyst with the almanac, says Congressional inaction does seem to benefit the markets historically. “Basically, gridlock is good for the Street,” says Brown.
Jaret Seiberg, a financial policy analyst with the Stanford Washington Research Group in Washington, D.C., says Singer's theory is certainly intriguing. He says he's heard of hedge funds with government action-related strategies but never anything so broad as Singer's fund. “It's the age-old cliché that the country is better off when Congress is at home,” says Seiberg. “I find it interesting that someone has found a financial model to speak to that.”
However, Singer says it's more than a model based on a nation's pessimism about its leaders. And he says he has the data to back it up. Using the Standard & Poor's 500 Index as his measure, Singer has reviewed 40 years of stock data and government calendars. He found that at least one chamber of Congress is in session for more than half of the 250 or so trading days of the year — yet, the index made a greater share of its price gains when Congress was on vacation. According to his data charts, an investor who followed his basic strategy from 1965 to 2005 of being fully invested in the S&P 500 when Congress was away and in cash when Congress was in session would have generated an annualized return of 11.5 percent, compared to 10.1 percent for an investor that stayed in the S&P the whole time (see chart). That suggests a cumulative return of 6,551 percent for Singer's basic strategy, versus 4,681 percent for the index.
While the back-tested basic strategy assumes 15 to 25 trades a year, a number that reflects how many times Congress goes in and out of session, Singer says he trades far more than that for his own clients. Because of SEC rules regarding hedge fund advertising and investor solicitation, Singer won't discuss the performance of his SCF fund, which went live in mid-2004. He even declines to disclose how much capital is in the fund. As for his fee, he says only that it's “typical” for a hedge fund.
Too Simple to Be True?
To be sure, not everyone thinks Singer's theory holds water. Stuart Brown, a finance professor at Florida State University, is one of them. “Correlation is not causation,” says Brown, who thinks Singer's anecdotal evidence is not enough and that the universe of variables affecting stock prices is too vast to pin it on Congressional attendance records. He also points to the oft-quoted problem of back testing any theory. Says Brown: “Past results have absolutely no bearing on future results.”
Also, what of the odd pro-business moves Congress has enacted, such as deregulating the telecom business or dismantling Glass-Steagall? And, most recently, Bush reduced taxes on dividends.
Singer is sticking to his guns. “This is an idea that is starting small, but over the next 10 years this will be a way for discerning how much wealth is prospectively destroyed every time a new regulation is proposed,” says Singer.
| Test IRR | SCF Back-Total | S&P 500 Return |
|---|---|---|
| 2001-2005 | 6.70% | 0.50% |
| 1995-2005 | 7.60 | 9.0 |
| 1985-2005 | 9.90 | 11.80 |
| 1965-2005 | 11.10 | 10.10 |
Singer's Basic Strategy
Singer's basic strategy — being fully invested in the S&P 500 when Congress is on vacation, and completely out of the market when Congress is in session — compared to a strategy of remaining fully invested throughout and reinvesting dividends
| Year | Basic Strategy | Always In Mkt + Div |
|---|---|---|
| 1965 | 5.57% | 12.31% |
| 1966 | 13.47 | -10.15 |
| 1967 | 13.15 | 23.87 |
| 1968 | 10.21 | 10.62 |
| 1969 | 13.23 | -8.53 |
| 1970 | 31.17 | 3.78 |
| 1971 | 19.59 | 14.31 |
| 1972 | 17.68 | 19.04 |
| 1973 | 2.67 | -14.82 |
| 1974 | -3.51 | -26.59 |
| 1975 | 13.45 | 37.16 |
| 1976 | 17.26 | 23.61 |
| 1977 | 6.47 | -7.47 |
| 1978 | -8.05 | 6.31 |
| 1979 | 14.98 | 18.23 |
| 1980 | 36.89 | 32.14 |
| 1981 | -2.48 | -5.14 |
| 1982 | 20.12 | 21.33 |
| 1983 | 9.85 | 22.41 |
| 1984 | 10.70 | 6.07 |
| 1985 | 17.27 | 31.56 |
| 1986 | 7.07 | 18.56 |
| 1987 | 7.96 | 5.47 |
| 1988 | 9.26 | 15.97 |
| 1989 | 22.70 | 31.37 |
| 1990 | 10.32 | -3.24 |
| 1991 | 27.22 | 30.36 |
| 1992 | 14.45 | 7.59 |
| 1993 | 10.36 | 10.02 |
| 1994 | 3.53 | 1.22 |
| 1995 | 11.17 | 37.43 |
| 1996 | 8.40 | 22.89 |
| 1997 | 2.18 | 33.31 |
| 1998 | 15.41 | 28.53 |
| 1999 | 19.44 | 21.01 |
| 2000 | -0.78 | -9.10 |
| 2001 | -6.87 | -11.93 |
| 2002 | -3.56 | -22.13 |
| 2003 | 30.53 | 28.54 |
| 2004 | 13.88 | 10.80 |
| 2005 | 3.68 | 4.82 |
