In April, renowned runner and Republican Senator Josh Hawley prevented elected leaders from owning securities and investment laws.
The law goes round to spell out the last name of longtime MP Nancy Pelosi, whose obvious stock market prowess (actually traded by her investor husband) who turned her into a meme among day traders.
There is also a ticker $NANC that mimics the purchases of Pelosi and her colleagues, and even an ETF called “the rare whale destructive democratic trade ETF.” Since its founding in 2023, it has significantly surpassed the S&P 500.
Of course, this issue is not just the diaphysis, nor is it Democrats. As the NYT wrote in a big survey several years ago, a long-standing concern was that “congressional members can buy and sell shares with almost limits despite their impact and widespread access to information.”
In 2012, President Barack Obama signed the law. This imposed at least some restrictions on the trading activities of Congress members, including a ban on obvious insider trading. It also introduced a bit of sunlight to muddy subjects by requiring Congress members and their spouses to make financial transactions public within 45 days, as opposed to once a year.
But since then, the foul smell has continued hanging from Congressional deals. That led to at least symbolic bipartisan support for at least some sort of blanket ban. Pelosi himself changed from opponent to supporter a few years ago, saying President Donald Trump would “absolutely” sign a law banning Congressional transactions in April.
But aside from the massive ethical issues here, are members of Congress actually good at trading? That’s something Alphaville has been wondering for a while.
Previous studies have shown that simply mimicking the holdings of US Senators can generate “abnormal” returns, but the data was sparse, making it difficult to draw solid conclusions. Fortunately, the strict disclosure requirements of the Equity Act led to a rich database of parliamentary transactions that researchers seized in Glee.
At least on the total, we see that Pol may not have a golden touch. Researchers who studied post-stock periods found “there is no evidence of excellent investment performance.” In fact, on average, the members of the house would have been better if they were sticking to index funds.
But just because Congress is doing a mediocre job of choosing stocks on average, that doesn’t mean that their transactions have absolutely no information value. As Yin Luo, head of quantitative research at Wolfe, wrote in a recent report on the subject:
In an attack, if a particular Congressional transaction is anticipating inventory movements, there may be an opportunity to hang on those signals, or at least recognize them in idea generation. For defense, even if on average there is no unusual returns, a surge in lawmakers’ trade could indicate new risks or themes (for example, large sales by lawmakers could predict regulatory headwinds as sector headwinds).
At the very least, tracking these transactions can provide colour to what policy-knowledge people are doing with their money: the form of “alternative data” in the connection between politics and finances.
So, what did Luo and the team find? Well, first of all, some people on the hills even did a bit of Nut Trading Stonk in 2020-21. Moreover, they remain a bundle of modest degrees, judging by a still decisive amount of the overall deal.
The data represents 309 individuals and has around 52,000 individual transactions. The overwhelming majority are individual stocks, with options, bonds, funds and (UGH) cryptos in a minority.
Republicans are more likely to trade than Democrats in both Congress and Senate, but Congressional Democrats who do trade have more vibrancy and trade.
Congressional disclosures report transactions in the dollar range, most of which range from $1,000 to $15,000, and sometimes flutters in the $15,000 to $50,000 range. As you can imagine, the majority of the bets were in large US capstocks, with no notable divisional differences between those purchased by Republicans and Democrats.
A little surprising, a considerable number of transactions have been reported much later than the 45-day rule is stipulated, with some disclosures landing months or years after they are to be filed. And even if the data was too sparse to draw solid conclusions, belatedly reported transactions tended to be very good.
However, here are four solid things drawn from the data by analysts at Wolfe Research.
1) The council can feel the change in atmosphere:
Transactional activities tend to rush major political events and transitions. For example, the number of house trades jumped from early 2017 to early 2019. These periods correspond to the power shift (a new administration was seen in 2017).
Similarly, we see the surge from late 2020 to 2021 until 2021, when the White House and Senate switched party controls. It appears that lawmakers may readjust their portfolios in response to expected policy shifts if there is a change in the air.
2) Congress loves BTFD:
Overall, Congressional members reduced trading during the Covid-19 market clash in early 2020. In both rooms and both parties, many lawmakers were active in late February and March 2020, when the market was falling sharply.
I especially bought many of them. Anecdotes, some well-known cases have been when senators unload travel stocks and bought high-tech and healthcare names ahead of pandemic news. Our data confirms the volume increase. In hindsight, those who bought during panic have improved considering the sudden rebound that followed.
3) Democrats are from Venus, a Republican on Mars.
There is contrast to regime-related actions. House Democrats tended to trade more frequently during the divided government period. That is, when Republicans were president, or the GOP had at least one room in control. Out of full power, they may have responded more to development or called for a relocation when policy impacts were constrained.
Meanwhile, House Republicans have shown an interesting pattern of increasing stock sales during the transition of power (for example, when Democrats seized the House, when Democrats took the Senate and the White House, and once again when the House returns to the GOP). These waves of sales could indicate Republicans are pulling back from the market when they expect to reduce business-friendly policies, or simply profiting as administrations change. Additionally, House Republicans exhibited heavy transactions (both purchase and sale) between 2015 and 2018, when political parties were under the control of a unified government.
4) Whether your party is in power is important:
Our analysis suggests that Senate Democrats increased trading activity during certain transition points. Particularly in 2017 (when the GOP gained unified control) and 2019 (when the Democrats won the House). In contrast, Senate Republicans actually pulled back the deal when Democrats controlled the government.
From 2021 to 2023, when Democrats served as presidency and (for some of them) in Congress, Republican senators significantly reduced trade activities. This may reflect less vigilance and obvious opportunities when their party loses power. Conversely, Senate Republicans were more aggressive during periods of greater influence (e.g., since 2016).
So how predictive are these transactions? Are Democrats and Republicans particularly familiar with stock punts or are they sufficient to *cough*? According to Luo and her colleagues, the photos are subtle.
Buying Republican stocks generally felt bad when Democrats were dominant, but when the party was fully in power, it was “pretty visionary.” As Republicans control the House, Senate and presidency, stocks purchased by GOP members tended to surpass the market by about 12% over the next two years.
“This is a substantial excess of returns and is statistically significant in our tests,” Wolfe’s Quants wrote, providing this possible explanation.
Intuitively, when Republicans hold presidency and Congress, Republican lawmakers may better recognize the visibility of business-friendly policy moves (such as tax cuts, deregulation efforts, government contracts) and therefore act on information and expectations that will give them an edge. This is especially relevant today as it is the regime where we live.
By contrast, when Democrats controlled Washington, House Republican trade was not particularly extraordinary. When their party is in power, their edges seem to be clear. Perhaps because they are more “in the loop” about positive developments.
The Democratic Party’s patterns were slightly different. They did particularly well when the Senate was under Democrat control – even if the house wasn’t. In a scenario where DEMS was at least partially controlled, stock purchases resulted in an average excess return of 8% over the next two years.
But Democrat stock trading was, on average, a positive signal regardless of the political system, not when they didn’t control the government’s different weapons.
In fact, for almost every period, if they had put them in the portfolio and bought and held by House Democrats, they would have on average been very meaningful outperformed the market.
This was an impressive result, suggesting that Democrats, at least on the buyer side, had information and instincts often directed at the winners. There may be many reasons. House Democrats may be violating regulatory news (thinking EPA decisions, FTC actions, etc.) that benefit certain businesses.
Of course, it could also be the result of some Democrats being particularly good stock pickers and distorting the average. I’ll revisit individual performances later.
That last line is, unfortunately, Wolf’s complete red herring.
Now, you’re probably desperate for the definitive ranking of the best and worst stock jockeys on the hill. We were certainly at this stage when we read Wolf’s report. However, despite their promise to include one, the research outfit appears to have sprinted through the chickens in the final production of the report.
Most members of Congress say they actually perform markets that back up previous research, but say they “support a handful of lawmakers in consistently profitable transactions.”
It refrains from saying who they are, but it appears they have to be members of the GOP. While the Democrats have demonstrated the most beneficial stock trading, the sustainability of the outcomes for some Republicans was particularly noteworthy, Lou et al.
Congress’ trading skills (or luck) are not evenly distributed. Some seem to have it and tend to last in the short term. This reinforces the idea that we don’t just deal with random stock picking. Some lawmakers may be familiar with better information networks or investments, leading to a good call string.
You will need to calculate your data yourself one day, but you will have to wait for future posts.
