NEW YORK — As the U.S. presidential election approaches, concerns about its potential impact on retirement savings, particularly 401(k) plans, resurface. Warnings about market volatility during election years can increase anxiety among investors, but it’s essential to recognize that for many, their 401(k) plans primarily invest in indexed funds tracking the S&P 500 and other broad markets, making the election noise less impactful.
Historically, stock markets exhibit increased volatility in the months leading up to Election Day. The bond market, too, experiences about a 15% increase in volatility during this period, a pattern attributed to financial markets’ aversion to uncertainty regarding future policies. However, once the election results are announced, market stability typically returns, regardless of which party secures the presidency.
More critical than party affiliation of the sitting president is where the overall U.S. economy sits within its economic cycle. Long-term market performance correlates more closely with these business cycles than with political control, suggesting that the economic environment plays a much larger role in determining market health.
Debates continue on the current state of the economy, which has been on an upward trajectory since the 2020 recession triggered by the COVID-19 pandemic. While some investors are concerned that this growth phase may be approaching its conclusion, others maintain optimism that the expansion will persist, especially with the Federal Reserve’s recent interest rate cuts.
Political influences can indeed steer market performance, particularly across various sectors. Historical data indicates that tech and financial stocks tend to outperform after a Democratic president assumes office, while raw-material producers see relative gains following a Republican president’s election. Additionally, congressional control plays a pivotal role in shaping fiscal and tax policies, with gridlock potentially limiting significant changes, irrespective of the presidential outcome.
This upcoming election presents unique dynamics. Former President Donald Trump’s advocacy for tariffs could lead to elevated import costs. Economists warn that if universal tariffs were enacted, U.S. stocks might fall by approximately 10%, effectively functioning as a sales tax on consumers; however, they assess the likelihood of such an event as relatively low, at about 10%.
