401(k) election impact/ presidential election 401(k)/ market volatility election/ election financial markets/ election stocks/ Newslooks/ NEW YORK/ J. Mansour/ Morning Edition/ While U.S. elections often bring concerns about market volatility, historical data shows that political outcomes have less impact on 401(k) investments than economic cycles. Investors may see some short-term fluctuations, but over the long term, stock performance is more closely tied to the business cycle than which party controls the White House.
How Elections Really Impact Your 401(k): Quick Looks
- Election Volatility Is Temporary: Stocks and bonds tend to experience more volatility leading up to Election Day due to uncertainty, but markets typically stabilize once the results are in.
- Business Cycle > Political Party: Over the long run, the state of the economy plays a more significant role in market performance than the party in power.
- Sector-Specific Impact: Certain sectors may perform better depending on which party wins, but these effects are short-term and less likely to drastically affect broad index funds.
- Congress Matters Too: A split Congress tends to limit sweeping policy changes, reducing the potential for market upheaval.
- Tariffs Could Be a Factor: In extreme scenarios, policies like sustained tariffs could have a more noticeable impact, but such risks are low.
Why Elections Have Less Impact on Your 401(k) Than You Think
Deep Look
As the election season heats up, so do concerns about the potential impact on 401(k) retirement accounts. Every four years, investors hear warnings that the uncertainty surrounding the U.S. presidential election could shake up financial markets and potentially harm their savings. However, while market fluctuations do occur leading up to Election Day, long-term impacts on 401(k) investments may not be as dramatic as feared.
If your 401(k) is invested in broad index funds, such as those tracking the S&P 500, the volatility often seen in election years is unlikely to have lasting effects. Financial markets typically dislike uncertainty, and the period from mid-September through Election Day tends to see increased shakiness. According to Monica Guerra, a strategist at Morgan Stanley, volatility in the bond market rises by an average of 15% during election season.
But after Election Day, when the uncertainty of the political outcome subsides, the markets generally return to their usual behavior. Guerra’s research shows that the volatility surrounding elections tends to stabilize after results are known, regardless of which party wins the presidency.
Economic Cycles Matter More Than Politics
While it’s easy to attribute stock market changes to the political party in power, history shows that market performance is more closely tied to the economic cycle than to the results of an election. Whether a Republican or Democrat is in the White House, the economy’s movement from recession to expansion tends to have a bigger impact on long-term market performance.
As Guerra wrote in her recent report, “Over the long term, market performance is more closely correlated with the business cycle than political party control.”
Currently, the U.S. economy is still growing, following the recovery from the COVID-19-induced recession in 2020. However, opinions differ on how much longer this expansion will last. Some investors are pessimistic, believing that the effects of prior Federal Reserve interest rate hikes will slow the economy soon. Others are optimistic, expecting the expansion to continue, especially now that the Fed has started cutting interest rates to stimulate growth.
Sector-Specific Winners and Losers
Though overall stock market performance is driven by economic trends, certain sectors may perform better depending on the election’s outcome. Historically, tech and financial stocks tend to perform well under Democratic leadership, while industries like raw material producers see relative gains under Republicans, according to Morgan Stanley’s analysis.
However, for most 401(k) investors, especially those with diversified portfolios or investments in broad-based index funds, these sector-specific shifts are unlikely to significantly impact their retirement savings over the long term.
Congressional Control Matters
The political makeup of Congress can also influence market behavior. When Washington is gridlocked—such as when one party controls the presidency and another controls Congress—fiscal and tax policies are less likely to change drastically. This can reduce the potential for market volatility because fewer sweeping reforms are expected.
Potential Risks Like Tariffs
While the candidates’ positions do matter, the risk of significant market disruption due to election outcomes is generally low. Former President Donald Trump, for instance, is known for his strong stance on tariffs, which raise the cost of imported goods. Some economists, like those at UBS Global Wealth Management, predict that sustained tariffs could drag U.S. stocks down by as much as 10%, effectively acting as a tax on American households.
However, the likelihood of such an extreme scenario playing out is low. UBS estimates the chances of the U.S. implementing widespread tariffs at just 10%.
The Bottom Line
While election season brings increased market volatility, long-term investors—particularly those saving for retirement in 401(k)s—are more likely to be influenced by economic cycles than political changes. Staying focused on long-term goals and maintaining a diversified portfolio is the best way to navigate election-year uncertainty.
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