As the U.S. presidential election approaches, concerns about its potential impact on financial markets, including retirement savings such as 401(k) accounts, have been raised. However, for many retirement savers whose 401(k) investments are primarily in funds tracking the S&P 500 or other broad indexes, the election-related noise may not significantly affect their portfolios.
Historically, stocks tend to experience increased volatility in the months leading up to Election Day, as uncertainty surrounding the outcome prevails. This heightened volatility is also observed in the bond market during this period. However, post-election results, regardless of the winning party, typically lead to a stabilization of market volatility.
Research indicates that the long-term performance of the market is more closely tied to the business cycle than to political party control. The current state of the U.S. economy, which has been in a growth phase since the 2020 recession triggered by the COVID-19 pandemic, remains a topic of debate among investors.
Political factors can influence specific industries and sectors within the market. For instance, tech and financial stocks have historically performed well following a Democratic president's inauguration, while raw-material producers have seen relative success under Republican administrations.
Furthermore, the control of Congress is deemed equally significant as the presidential outcome, as a divided government often results in less drastic changes to fiscal and tax policies.
While the current election candidates diverge from historical norms in certain aspects, such as differing views on tariffs, the likelihood of extreme scenarios, like sustained and universal tariff implementation, remains relatively low.
Economists and strategists suggest that in a scenario of widespread tariffs, U.S. stocks could experience a decline of approximately 10%, akin to a sales tax on households. However, the probability of such an event occurring is estimated to be minimal, around 10%.
