The manager of the Congressional Effect Fund, Eric Singer, writes:
The long term record of the stock market when filibusters are not available is downright awful. The numbers have improved slightly since I first pointed this out in September 2009, because of last year's sharp rally. However, even including last year's robust rally, during the two periods when the Senate Democrats held a 60 vote majority, the S&P 500 index has gone up in price about 2.6% a year in the 15 years since 1934 when such a majority existed. Through the end of 2009, in the 60 years where the minority could successfully filibuster, the market appreciated 7.6%, an annual difference of 5%. For comparison's sake, the S&P 500 Index has risen from 9.50 at the end of 1934 to 1115.10 at the end of 2009, an overall annual compounding price return of 6.6%.
One of the big risks many businesses face today is political risk. This is a newly top-of-mind risk for American investors. With its push towards healthcare "reform," Congress now proposes to impose central planning on 16% of the American economy with a reconciliation vote in the Senate requiring a mere majority. If successful, this form of governance will mean all segments of the economy are subject from now on to a new dramatic change by mere majority votes. Given the stock market's current domestic equity capitalization of about $15 trillion according Wilshire Associates, the loss of 5% per year in potential appreciation amounts $750 billion in lost wealth per year for the foreseeable future, or roughly $75,000 per household over the next decade. As you can guess, this will NOT be good for employment, or our lifestyles.
The numbers from September 2009 can be updated as follows. Let's go back in time, and impose the consequences of the end of the filibuster power implied by the ability to pass health care with a simple majority. Assume that the stock market appreciated at the 2.6% rate during the 36 years that there was a unified government with a bare majority or better, and that it appreciated at 7.6% during the 38 years when there was split government. If this hypothetical relationship between runaway government and the stock market had held in the past, the S&P 500 Index would have been at 397.23 at the end of 2009, about 65% lower than its actual closing. On the Dow, this would be roughly equivalent to a close of 3,770 at the end of 2009, as compared to its actual close of 10,583. If the market actually has returns like this over the next ten years, it will be a Depression, and finally be called such.
In September, when I first observed this relationship between a filibuster-proof majority and stock market performance, I finished this thought pointing out "Whether or not these mathematical relationships would exactly hold, the clear import is that if we lose the filibuster as a restraint on government expansion, we can expect further sub-par returns like the ones we've had since the beginning of this century. In addition to the damage already suffered in the stock market in the last few years, an unrestrained majority government would dramatically increase Congressional wealth destruction. Someone once described democracy as 'two wolves and a lamb voting on what to have for dinner.' When Ben Franklin was asked at the end of the Constitutional Convention 'what have you given us,' he replied, 'a Republic, if you can keep it.' I think 2.6% per year reflects the returns of mere democracy. I think we are all better off with a Republic, pursuing happiness at 7.60% per year." With the sleight of hand of using reconciliation to pass a central planning scheme for the most important 16% of the economy, Congress will have defined governing down. We will all be much poorer as a result.