In today's Investor's Business Daily, there is a wonderful quotation from a bank CEO that, I think, neatly sums up the problem caused by an activist government. The quotation can be found buried in a story about how banker pay curbs (passed in the House Wednesday) may actually have negative effects upon insittutions that accept TARP money. The story says that the Pay for Performance Act would "send a bad signal to markets and could spur more banks to return their TARP funds," in effect defeating the purpose of TARP.
But this banker thinks the problem is bigger: "They're passing so much legislation these days, who knows what's going to impact us," said John DiMichele, CEO of Community Business Bank of West Sacramento, which had taken just under $4 millino in TARP funds. "As soon as we can get [TARP funds] back to the Treasury, the better off we'll be."
We tend to agree with some financial types that, in general, Congress is bad for business. In 2006, two researchers found that the stock market does better when Congress is adjourned. "More than 90% of the capital gains over the life of the DJIA have come on days when Congress is out of session," wrote Michael F. Ferguson of the University of Cincinnati and H. Douglas Witte, then of the University of Missouri, in an IBD story.
Academic studies are nice, but proof in the real world would be nice, right? There is at least one active mutual fund that goes long when Congress is out of session and goes to cash (or cash-like insturments) when Congress is in session. For more, go to the Registered Rep. feature story on Eric Singer, portfolio manager of the Congressional Effect Fund. By the way, since inception last May, the Congressional Effect Fund is down just 6.6 percent versus a 40 percent-plus drop for the S&P 500; for the seven months of its existence in 2008, it was off just over 2 percent.