“When Mr. Smith Goes to Washington, Sell!” summarizes research finding that the U.S. stock market generates higher and less volatile when Congress is not in session. Is this finding robust to inclusion of recent data? To check, we examine average daily returns when the U.S. Senate is in session and out of session based on open-to-open market data (for alignment of daily Senate activity to potentially related daily trading). Using Senate in session data, party in power data and daily opening levels of the S&P 500 Index for 1978 through 2009 (partial through June 12), we find that:
Over the entire sample period, the U.S. Senate is in session 4,742 trading days and out of session 3,193 trading days. Activity varies with the two-year election cycle and with unusual events.
The following chart summarizes average daily open-to-open S&P 500 index returns when the U.S. Senate is in session and out of session for various conditions over the entire sample period. The number in parentheses after each condition is the number of years during which the condition exists. Some subsamples are small. “All Days” represents average daily returns weighting the return for each day equally. “All Years” represents the average of the average daily returns calculated by calendar year. Results for Democratic (D) and Republican (R) control of the Senate and the Presidency are on an “All Years” basis. Results broadly suggest that:
- Whether weighted by day or calculated and weighted by year, there is practically no difference in average daily returns while the Senate is in session and out of session.
- Differences for in-session/out-of-session average daily returns are modest for the small subsamples defined by party control of the Senate and Presidency.
The standard deviation of daily returns over the entire sample period, on an “All Days” basis, is 1.10% (1.12%) while the Senate is in (out of) session, indicating no material difference in return volatility.
In summary, in contrast with cited research, limited tests do not support a belief that the stock market reliably generates higher and less volatile returns when the U.S. Senate is not in session.
