Pocket watching politicians
Photo via: forextime.com,/Public domain/Wikimedia Commons
When it comes to investing, everyone’s goal is to outperform the market. Many throw their cash in the ring but the truth is only 7% of investment professionals are able to beat the average return rate of the S&P 500, a stock market index that tracks the 500 largest publicly traded companies in the U.S., over a 20-year period.
If the professionals rarely beat the market, then something suspicious is afoot when a third of Congress, who reportedly buy and sell stocks, saw a return rate well above market average in 2023. There are about 100 congressional traders (plus their family members) and some saw their investment portfolios grow by over 50%.
Similarly, in 2020, some of these same politicians demonstrated impeccable timing and sold millions of dollars in stocks right before the catastrophic COVID-19 market crash.
A study done by Unusual Whales concluded that, during 2023, trading members of Congress could have made up to $1 billion in stock and options trades, which is hundreds of millions of dollars more than in 2022.
The word “could” is used because the 45 day period in which these politicians are supposed to report their transactions had reportedly been ignored and instead were seen up to a year after. This means that the estimated revenue could be (and probably was) much higher. While this is in direct violation of the Stop Trading on Congressional Knowledge (STOCK) Act, no consequences were enforced.
The STOCK Act was passed in 2012, making it clear that the laws against insider trading also apply to members of Congress and their staff members. It prohibited members of Congress from trading using any information that was “derived from such a person's position” or “gained from the performance of such person’s official responsibilities.” Basically, any information that isn’t publicly released is prohibited from being used to trade.
In fact, no consequences have been enforced ever since this act was passed, sparking questions about its effectiveness. This has led people to lose faith in the prevention of insider trading, so as the old saying goes, if you can’t beat em’ join em.’
Unusual Whales, the same group responsible for studies illustrating the use of insider trading, created two exchange traded funds (ETFs) that track these congressional transactions. An ETF is a type of investment fund that is essentially a basket of assets, allowing you to own multiple securities at once.
They go by the ticker symbols NANC (after Nancy Pelosi) and KRUZ (after Ted Cruz), and allow investors to put their money in a portfolio that mimics that of our amazing and talented stock-wiz’s on the hill, in an attempt to even out the playing field.
The idea that the playing field isn’t level is actually dangerous to the market itself. It discourages investors from entering the market because of the strong disadvantage they face against the unethical behavior of officials we trust to help run our country. This causes less people to invest making it difficult for firms to raise money and grow their businesses, resulting in a slower market that affects everyone, whether you own shares of the market or not. All so already wealthy individuals can use their privilege to bring in even more money for themselves.
This is why organizations like Unusual Whales are trying to create ways to increase investor sentiment once again and show that there are still ways to maintain a positive outlook even without the same insider information others benefit from.
If investing in ETFs isn’t specific enough, there is an investment app known as Autopilot that takes it one step further. The app tracks the activity of politicians of your choosing and when their trades become public, it will automatically set the trade for you.
However, this relies on Congress actually reporting their stock activity which as we’ve seen in the past, doesn’t always happen and even if they do, there is still a 45-day grace period allowed before the information has to become public.
If you prefer to do it yourself, websites, such as Capital Trades and Barchat, have records of all politicians' reported trading history accessible to sift through.
While it is clear that some insider trading is going on, not all of Congress is on board with this blatant disregard for the law. Democratic Sen. Jon Ossoff of Georgia introduced the “Ban Congressional Stock Trading Act,” which would restrict members of Congress and their families from buying and selling individual stocks. The legislation was introduced to further address insider trading and ensure that elected officials prioritize their public duties over personal financial interests.
In 2023, bipartisan legislation was introduced by Sens. Kristen Gillibrand and Josh Hawley, titled the Ban Stock Trading for Government Officials Act that would simply ban members of congress and the executive branch from stock ownership and blind trusts.
Neither of the aforementioned legislation has been very popular among congress and while there may be some hope, insider trading doesn’t look like it is going anywhere anytime soon.