What is the Congressional Effect?

The Congressional Effect is a theory that suggests the performance of US stock prices is affected by whether Congress, which makes American law, is sitting or not.

Where have you heard about the Congressional Effect?

The term was coined by New York trader Eric T Singer. He found that, on average, the flagship S&P 500 index performs better on days that both houses of Congress are not in session – in other words, when the lawmakers can do the least amount of damage.

What you need to know about the Congressional Effect.

Research found that between 1965 and 2008, the S&P 500 index rose at an annualised rate of 0.31% on trading days Congress was in session, but 16.15% on days it was not in session.

Part of the discrepancy can be explained by seasonal factors as stock markets generally perform better in the run-up to holiday periods, but that doesn't account for why there is such a big difference.

The study also showed that stock markets tend to be more volatile when lawmakers are in session, and are more likely to decline when public approval ratings for Congress fall.