Elections have less impact on your 401(k) than you might think

NEW YORK (AP) — Much like those annoying political TV ads, the warnings come back every four years: All the uncertainty surrounding the U.S. presidential election could have serious consequences for your 401(k)!

Such warnings can be fear-inducing, but remember: If your 401(k) is like that of many retirement savers and most are invested in funds that track the S&P 500 or other broad indexes, all the noise may not make much of a difference.

Stocks tend to falter in the months leading up to Election Day. According to an analysis by Monica Guerra, a strategist at Morgan Stanley, even the bond market sees an average increase in volatility of 15% from mid-September of an election year to Election Day. This may be partly because financial markets hate uncertainty. In the run-up to the election, there is great uncertainty about which political measures will prevail.

But once the results are in, regardless of which party wins the White House, the uncertainty disappears and markets get back to work. Volatility tends to stabilize, as Guerra’s report shows.

What’s more important to stocks in the long run is not just which party controls the White House, but also where the U.S. economy is from recession to expansion and back again over the decades.

“In the long run, market performance correlates more closely with the business cycle than political party control,” Guerra wrote in a recent report.

Where the economy is currently in its cycle is up for debate. It has been growing since the 2020 recession caused by the COVID-19 pandemic. Some bearish investors expect the expansion to be over soon, with any cumulative slowing effects of the Federal Reserve’s rate hikes in recent years still to be felt. Other, more optimistic investors believe the expansion may continue after the Fed cuts interest rates to stimulate the economy.

Politics can have some influence beneath the surface of stock indices, influencing which industries and sectors perform best. Technology and financial stocks have historically outperformed the rest of the market a year after a Democratic president takes office. Meanwhile, for a Republican, commodity producers were among the relative winners, according to Morgan Stanley.

Plus, control of Congress could be just as important as who wins the White House. A gridlocked Washington with divided control is less likely to see sweeping changes in fiscal or tax policy, regardless of who the president is.

Of course, the candidates in this election differ from history in some key ways. Former President Donald Trump is a strong supporter of tariffs that, for example, increase the cost of imports from other countries.

In a scenario where the United States applied permanent and universal tariffs, U.S. stocks could fall about 10%, according to economists and strategists at UBS Global Wealth Management, as the tariffs would ultimately act like a sales tax on U.S. households.

However, they also see a relatively low probability of such a scenario occurring, at around 10%.