Not what they expected. That's the take on the stock market's sudden decline this August. The third year of a president's term is normally a good one for stocks -- and history shows that when Congress is in recess, as it is now, markets almost always rally.
One product makes clear exactly how unusual this year's slide has been, and offers a clue as to why 2011 broke the rules. It's called the Congressional Effect Fund. Founded by Wall Streeter Eric Singer in 2008, the fund is premised on the idea that equity markets dislike a hostile Washington, tolerate a friendly Washington, but prefer an inactive Washington above all.
It follows that stock-market rallies would come most often when Congress is idled -- in recess, at home, in the districts. From 1965 until early this summer, the Standard & Poor's 500 Index, Singer's proxy for stocks, rose 17 percent while Congress was out of session versus only 0.9 percent while Congress was working in Washington.
In one study, four scholars took a step back to look at a century of returns -- from 1897, just after the Dow Jones Industrial Average was founded, to 1997 -- and found that average daily returns when Congress was out of session were almost 13 times higher than when it was in. Their explanation: "Perhaps the market enjoys the temporary certainty exhibited by the absence of Congressional decisions."