Elections have less impact on your 401(k) than you might think
NEW YORK– Just like those annoying political TV ads, the warnings come back every four years: All the uncertainty surrounding the US presidential election could have a major impact on your 401(k)!
Such warnings may evoke fear, but remember: If your 401(k) is like many retirement savers, with most invested in funds that call the S&P 500 or other wide indexes, all the noise may not matter much.
Stocks tend to get shakier in the months leading up to Election Day. Even the bond market sees an average 15% increase in volatility from mid-September of an election year through Election Day, according to a review by Monica Guerra, a strategist at Morgan Stanley. This may be partly because the financial markets hate uncertainty. In the run-up to the elections, there is great uncertainty about what kind of policies will win.
But after the results come in, regardless of which party wins the White House, the uncertainty disappears and the markets go back to work. Volatility tends to stabilize itself, according to Guerra’s review.
More than which party controls the White House, what matters long-term for stocks is where the U.S. economy is in its cycle as it has moved from recession to expansion and back again over the decades.
“Over the long term, market performance is more closely correlated with the business cycle than political party control,” Guerra wrote in a recent report.
Where the economy currently is in its cycle is up for debate. It has been growing since the 2020 recession caused by the COVID-19 pandemic. Some pessimistic investors think the expansion is nearing an end, with all the cumulative slowing effects of the Federal Reserve’s rate hikes in previous years still being felt. Other, more optimistic investors believe the expansion still has potential as the Fed cuts rates to suppress the economy.
Politics can have some influence beneath the surface of stock indices and influence which industries and sectors do best. Technology and financial stocks have historically outperformed the rest of the market a year after a Democratic president takes office. For a Republican, commodity producers were among the relative winners, according to Morgan Stanley.
Moreover, control of Congress could be as important as who wins the White House. A gridlocked Washington with split control is likely to see less dramatic changes in budget or tax policy, regardless of who is president.
Of course, the candidates in this election differ from history on some important points. Former President Donald Trump is a strong supporter of tariffs, which, for example, increase the cost of imports from other countries.
In a scenario where the United States were to implement persistent and universal tariffs, economists and strategists at UBS Global Wealth Management say U.S. stocks could fall by about 10% as the tariffs would ultimately act like a sales tax on American households.
But they also see a relatively low chance of such a scenario occurring, around 10%.