By: Katie Gomez

Election season always influences the economy and the stock market in some capacity. Yet, the last decade has shown us that the market is more intertwined with politicians than ever, specifically Congress. Despite efforts to remedy the ethical dilemma of insider trading, the divide between the success of 1% and retail traders could not have been more apparent. However, traders have reached their breaking point, deciding if you can’t beat them, join them. 

The stock market landscape is undergoing a revolutionary shift as politics and investing collide in unprecedented ways. Traders are now turning their attention to an unlikely source of market intelligence: the investment activities of members of Congress. This phenomenon has given rise to a new investment strategy that seeks to mirror the trading patterns of lawmakers who may have access to privileged information. As public scrutiny of congressional trading intensifies, investors are beginning to leverage this transparency to their advantage, creating a unique intersection of political awareness and financial opportunity. The media is portraying this emerging trend as a way to reshape investment strategies, challenge ethical boundaries, and offer retail investors a controversial edge in the market to level the playing field.

Is this game of following the leader actually leading retail traders to success, or is it just a wild goose chase that distracts the public while the rich get richer? How will this affect market sentiment with the presidential election looming? This article will unveil the truth, examining the implications of this “political trading,” uncovering whether this new frontier in stock market dynamics will finally level the playing field or is just a mirage clouding yet another decade of deceit.

The Dynamic between Congress and the Public 

Americans think only a little of Congress, as much of their work is done behind closed doors, but we are privy to one thing: what stocks they’re picking. The lawmakers of Congress are constantly at work, especially given the upcoming presidential transition come 2025, but if there is one thing they do not drop the ball in, it’s picking the right stocks. Traders and investors in the stock market have been keeping congressmen and congresswomen at the forefront of their minds since 2021, following their lucrative results in stock picking. However, many traders are unaware that they can access public data to track which members of Congress must report their market gains.

This all started over a decade ago with the STOCK Act (2012). This legislature was designed to combat insider trading among lawmakers but has produced unintended consequences that have reshaped the investment landscape. Originally designed to increase transparency and curb potential abuses of privileged information, the Act mandates public disclosure of congressional stock transactions exceeding $1,000. However, these disclosures have inadvertently fueled a new investment trend rather than dampening congressional trading. Instead of stopping insider trading in Congress, it has simply shone a light on it, and traders have been trying to use it to their advantage. Traders and financial firms now leverage these public reports to create investment products and strategies that mirror lawmakers’ trading activities. Companies are also now selling access to tools that track these profitable trades more in-depth and help investors copy their moves.

The Top Scorer: EFTs 

While they may not have the funds to mirror their investment strategy entirely, this has created a cottage industry of “political trading” funds and ETFs, which aim to capitalize on Congress members’ perceived informational advantage. Using this cheat code, investors have created special investment funds called ETFs that mimic what politicians buy and sell. Two popular ones are NANC, which copies Democratic politicians’ trades, and KRUZ, which follows Republican trades.

Although these funds are doing well, they lead traders into dangerous territory. While it’s exciting that anyone can now invest like a politician, it raises some big questions about fairness and ethics in the stock market. It’s a hot topic, with many discussing whether the rules must change. Traders that have found success with these EFTs are becoming clouded by short-term gratification, not realizing they are capitalizing on insider trading, which will fail to end well.

Ironically, the mechanism intended to discourage questionable trading practices has created new opportunities for investors to profit from congressional financial activities, raising concerns about the Act’s effectiveness and the ethical implications of such investment strategies. Although most traders are not privy to the information exchanged between the 1%, we can do our best to deduce any winners from the published Cliff Notes version.

Follow the leader or wild goose chase?

While some have recently found success in these EFT bundles, most traders will find that this follow-the-leader game has become a wild goose chase. Nothing is ever as it seems when it comes to insider trading. Publicly exposed stocks ripe for the picking, plucked right from the stem of insider trading? Sounds a little too good to be true, doesn’t it? CNN, The Washington Post, and NPR have all posted articles about how the Stock Act has allowed the little guy to win, prompting traders to follow the earnings reports to copy their success.

They are not mentioning just one caveat: how recent these “disclosures” are. Those newer to trading might see a new posting about a stock and blindly invest in that stock immediately, but experienced traders have been in this business long enough to know better; savvy traders know that those earnings reports are not recent enough to follow. Sure, they are required to disclose their gains, but not until three weeks post hence, and we all know how much the market changes in three weeks; just ask anyone who purchased Gamestop in 2021 once they saw an article on it. The best traders understand that once a stock’s success is public knowledge, it is no longer successful. The stock becomes flooded with false sentiment, bought up by all the sheep following the herd, inflating its price and losing its value.

For instance, traders following the moves of politicians like Nancy Pelosi ended up backfiring big time. Pelosi’s household name garnered more attention for her trades than most. While Pelosi herself doesn’t trade stocks, her husband’s investment activities have become a focal point, involving large-scale investments in tech giants and timely options trades that have yielded substantial profits. 

This has led to widespread speculation about potential access to insider information, creating a ripple effect on the market, with many retail investors closely monitoring and even mimicking these trades. However, by the time earnings are reported, and retail investors play “follow the leader,” the stock has lost its value, leading traders on a wild goose chase. As a result, the “Nancy Pelosi Effect” has become a symbol of the complex interplay between political power, market dynamics, and public perception in the modern investment landscape.

Overall, the intersection of congressional trading and retail investing has created a complex and contentious landscape in the stock market. While the STOCK Act was intended to increase transparency and curb insider trading, it has inadvertently spawned a new “political trading” trend, allowing investors to mimic lawmakers’ moves. However, this apparent democratization of insider information is not paving a better, fair trading future; it highlights market manipulation. Rather than leveling the playing field, this trend distributes a false sense of opportunity, potentially leading retail investors into treacherous waters. 

The viral nature of social media has amplified the impact of these trades, often leading to significant market movements based on congressional trading activity. As retail investors become more empowered and informed, their collective actions increasingly influence market trends and public policy discussions, highlighting the growing intersection of social media, retail investing, and political accountability, just in time for election season.  

So, as we approach the 2025 election, traders and investors must approach these strategies cautiously, recognizing that by the time congressional trades become public knowledge, their profit potential may have evaporated. The true challenge lies not in following the herd but in developing informed, independent investment strategies that can navigate the complex interplay of politics, market dynamics, and public sentiment. If you’re done following the media and the herds, visit Trade Ideas today to learn how to make the right decisions for you as a trader this election season.

References :

https://www.npr.org/2024/06/06/nx-s1-4974720/congress-stock-trades-profits