In April, well-known runner and Republican senator Josh Hawley reintroduced his Preventing Elected Leaders from Owning Securities and Investments Act, which would ban members of Congress and their spouses from trading individual stocks.
The act is tortuously named to spell out the surname of Nancy Pelosi, the longtime Congresswoman whose apparent stock market prowess (in reality the trades are done by her financier husband) has made her a meme among day traders.
There’s even an ETF called “Unusual Whales Subversive Democratic Trading ETF” with the ticker $NANC, which mimics the purchases of Pelosi and her colleagues. It has markedly outperformed the S&P 500 since its inception in 2023:
Of course, the issue isn’t just the Pelosis, or the Democrats. The broader concern has for years been that “despite their influence and extensive access to information, members of Congress can buy and sell stocks with few restrictions”, as the NYT wrote in a big investigation a few years ago.
Back in 2012, president Barack Obama signed into law the STOCK Act, which imposed at least some limitations on the trading activities on members of Congress, such as banning overt insider trading. It also introduced a little sunlight to a murky subject by requiring members of Congress and their spouses to publicly disclose any financial transaction worth over $1,000 within 45 days, as opposed to once a year.
However, there has continued to be a bad smell hanging over Congressional trading ever since — made even more pungent by well-timed trades by a handful of senators ahead of Covid-19. That has led to at least symbolic bipartisan support for some kind of blanket ban. Pelosi herself changed from an opponent to a supporter a few years ago, and President Donald Trump said in April he would “absolutely” sign legislation that would outlaw Congressional trading.
However, setting aside the massive ethical issues here, are members of Congress actually any good at trading? It’s something Alphaville has been wondering about for a while.
Earlier studies had shown that you could generate “abnormal” returns by simply mimicking the holdings of US senators, but data was sparse so it was tricky to draw firm conclusions. Fortunately, the STOCK Act’s stiffer disclosure requirement has led a rich database of Congressional trading, which researchers have seized with glee.
It turns out that pols might not have the golden touch, at least in aggregate. Researchers that studied the post-STOCK period found “no evidence of superior investment performance”. In fact, members of the House on average would have done better if they’d just stuck to index funds.
However, just because Congress on average does a mediocre job of picking stocks, it doesn’t mean that their trades don’t have any informational value whatsoever. As Yin Luo, head of quantitative research at Wolfe, wrote in a recent report on the subject:
On offense, if certain Congressional trades do anticipate stock moves, there may be an opportunity to piggyback on those signals or at least be aware of them in idea generation. On defense, even if no abnormal returns exist on average, spikes in lawmaker trading could indicate emerging risks or themes (for instance, heavy selling by legislators might foreshadow regulatory headwinds for a sector).
At a minimum, tracking these trades can provide color on what those with policy knowledge are doing with their own money — a form of “alternative data” that sits at the nexus of politics and finance.
So what did Luo and team find? Well, first of all that some people on the Hill also went a little nuts trading stonks in 2020-21. Moreover, they remain a bunch of low-key degens, judging by the still-decent volume of overall trading.
There are 309 individuals represented in the data, and about 52,000 individual transactions. The overwhelming majority are in individual stocks, with a small minority in options, bonds, funds and (ugh) crypto.
Republicans are more likely to trade than Democrats — in both Congress and in the Senate — but Congressional Democrats that do trade, trade with more alacrity.
The Congressional disclosures report trades in dollar ranges, and most are in the $1,000-$15,000 range, with a few occasionally having a flutter in the $15,000-$50,000 range. As you might expect, the vast majority of the bets were on US large cap stocks, and there were no notable sectoral differences between those bought by Republicans and Democrats.
Somewhat alarmingly, quite a few trades are reported far later than the 45-day rule stipulates, with some disclosures only landing months or even years after they were supposed to be filed. And those belatedly reported trades tended to be very good, even if the data is too sparse to draw firm conclusions.
However, here are four solid-ish ones Wolfe Research’s analysts drew from the data.
1) Congress can sense vibe shifts:
Trading activity tends to spike around major political events and transitions. For instance, the number of House trades jumped in early 2017 and early 2019 — these periods correspond to power shifts (2017 saw a new administration; 2019 saw the House flip control).
Similarly, a surge is visible around late 2020 into 2021, when the White House and Senate switched party control. It appears lawmakers trade more when there is change in the air, possibly rebalancing portfolios in response to expected policy shifts.
2) Congress loves to BTFD:
Across the board, members of Congress sharpened their trading during the early 2020 COVID-19 market crash. In both chambers and both parties, many lawmakers were active in late February and March 2020, a time when markets were plummeting.
Notably, a number of them were buying — anecdotally, some high-profile cases involved senators unloading travel stocks or buying tech and health care names ahead of pandemic news. Our data confirms an uptick in volume. In hindsight, those who bought during the panic did well given the subsequent sharp rebound.
3) Democrats are from Venus, Republicans from Mars.
We find a contrast in behavior related to regime. House Democrats tended to trade more frequently during periods of divided government — i.e., when a Republican was President, or the GOP controlled at least one chamber. It is possible that being out of full power, they reacted more to developments or sought to reposition when their policy influence was constrained.
On the other hand, House Republicans showed an interesting pattern of increasing stock sales during transitions of power (e.g., in 2019 when Democrats took the House, in 2021 when Democrats took the Senate and White House, and again in 2023 when the House flipped back to GOP). These waves of selling might indicate Republicans pulling back from markets when anticipating less business-friendly policies or simply taking profits as administrations changed. Additionally, House Republicans exhibited heavier trading (both buys and sells) during the period 2015—2018 when their party was in unified control of government — perhaps capitalizing on perceived favorable conditions.
4) It matters whether your party is in power or not:
Our analysis suggests that Senate Democrats ramped up trading activity during certain transition points — notably 2017 (when GOP took unified control) and 2019 (Democrats won the House). Senate Republicans, in contrast, actually pulled back on trading when Democrats controlled the government.
In the 2021—2023 period, when Democrats held the Presidency and (for part of that time) Congress, Republican Senators markedly decreased their trading activity. This could reflect wariness or fewer obvious opportunities when their party was out of power. Conversely, Senate Republicans were more active in periods where they had more influence (e.g., after 2016).
So how predictive are these trades? Are Democrats or Republicans particularly savvy or *cough* well-informed when it comes to punting stocks? The picture is nuanced, according to Luo and colleagues.
Republicans’ stock purchases generally fizzled when the Democrats were ascendant, but have been “quite prescient” when their party is fully in power. When Republicans control the House, Senate and presidency, stocks bought by GOP members tended to outperform the market by about 12 per cent over the next two years.
“This is a sizeable excess return, and it is statistically significant in our tests,” Wolfe’s quants wrote, and offered up this possible explanation:
Intuitively, when Republicans hold the Presidency and Congress, Republican lawmakers may have better visibility into business-friendly policy moves (tax cuts, deregulation efforts, government contracts, etc.) and thus might act on information or expectations that give them an edge. This is especially relevant today since this is the regime we currently live in.
By contrast, House Republican trades were not particularly extraordinary when Democrats controlled Washington. It appears their edge manifests when their own party is in power — possibly because they are more “in the loop” on positive developments.
The Democrat pattern was subtly different. They did particularly well when the Senate was Democrat-controlled — even if the House was not. In scenarios where the Dems had at least partial control, stock purchases led to an average 8 per cent excess return over the next two years.
However, Democrat stock trades were on average positive signals regardless of the political regime, albeit less powerfully so when they didn’t control different arms of government.
In fact, across nearly all timeframes, if you put into a portfolio every stock bought by a House Democrat and held it, it would have outperformed the market on average quite meaningfully.
This is a striking result, suggesting that at least on the buy side, Democrat House members often had information or instincts that pointed toward winners. There could be numerous reasons: House Democrats might be privy to regulatory news (think EPA decisions, FTC actions, etc.) that benefit certain companies, or they might have connections with industry experts.
Of course, it could also be a result of some Democrats being particularly good stock pickers, skewing the average — we will revisit individual performance later.
That last line is a complete red herring from Wolfe, unfortunately.
By now you are probably desperate for a definitive ranking of the Hill’s best and worst stock jockeys — we certainly were at this stage of reading Wolfe’s report. But despite promising to include one the research outfit seems to have chickened out in the report’s final production.
It says that while most members of Congress do in fact underperform the market — corroborating previous studies — it tantalisingly notes “handful of lawmakers stand out for consistently making profitable trades”.
It refrains from saying who they are, but it appears they must be members of the GOP. While Democrats as a whole have demonstrated the most beneficial stock trades, the persistence of the results of some Republicans was particularly noteworthy, Luo et al said.
Congressional trading skill (or luck) is not evenly distributed — some appear to have it, and it tends to persist in the near term. This reinforces the idea that we are not dealing solely with random stock picking. Some lawmakers may possess better information networks or investment savvy, leading to streaks of good calls.
We’ll have to crunch the data ourselves sometime, but that will have to wait for a future post.
https://www.ft.com/content/cf519014-ac78-43fb-aa17-d3e0eaf20b21
