Stocks are more volatile in presidential election years because markets don’t like uncertainty, meaning Americans can expect it to impact their 401(k)s next year .
Stocks and shares make up a large portion of many workers’ 401(k)s — so overall market performance will determine how much is in them at the end of next year.
American households are also investing more than ever actively in the stock market. The share of U.S. household equity in total financial assets was 36.3% in the third quarter, well above any previous economic cycle, MarketWatch reported.
Between 1952 and 2022, the average annual return of the S&P 500 – which tracks the stock performance of the 500 largest companies in the United States – was 12.17%, according to historical market data.
But during election years, over the same period, this figure was only 10.62 percent.
The average performance of the S&P 500 in years when the ruling party won and lost is shown. The performance of the markets three months before the elections (in gray) is indicative of the outcome of the elections.
An exception was 2020, when the S&P 500 gained more than 18% as outgoing President Donald Trump campaigned against Biden for the White House. Markets recovered as Congress passed Covid-19 stimulus packages.
Three months before the elections
However, the last three months before an election are usually when volatility hits.
And in the past, the performance of markets in those months has also been indicative of the outcome of elections, according to an analysis by Strategas Research Partners of more than 20 past elections.
If the S&P 500 is up in the three months before an election, the party in power usually wins.
However, if the markets are down during this period, the other side usually wins.
Indeed, when markets and the economy are doing well, sentiment is likely to be favorable to the sitting president. Smoother markets could therefore be correlated with Democrats retaining control of the White House.
A trader works on the floor of the New York Stock Exchange on November 16.
Consider exercising caution as you approach retirement
Still, those looking to plan for retirement shouldn’t be particularly worried, especially if they’re under age 50 or so and can “absorb short-term volatility,” said Christine Benz, director of personal finance and planning retirement for Morningstar, at DailyMail.com.
However, Benz suggested that older Americans approaching retirement may want to consider the risks associated with having a large portion of their assets tied up in volatile stocks.
“Buffering assets can help them weather prolonged stock volatility,” Benz said. These could be held either in short- and medium-term bonds or in cash, she said.
“Investors should really structure their portfolio in a way that they can absorb short-term volatility over a year, two years, or even a longer period of decline in performance.”
This sentiment was echoed by Mark Sorensen, CEO and founder of 401(k) Maneuver.
“It’s a question of safety versus risk and asset allocation,” Sorensen said. “I think in the short term, whatever volatility persists will be short-lived.”
Historical data supports the idea that investors become more conservative during election years and have shifted away from stocks likely to suffer rapid losses in favor of more liquid assets.
Morningstar data indicates that in election years between 1992 and 2020, an average of $76 billion net was invested in stocks. Over the same period, in the years following the election, that sum reached an average of $168 billion.
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But moving assets into cash can also be costly, as investors may miss out on a rebound, according to a Blackrock analysis.
Still, Benz also noted that workers who think they know exactly when they’ll retire should instead be careful, because anything can happen.
“Many factors can force people to leave the workforce earlier than expected,” she said. “It is important to be preemptive in terms of placing safe assets in the portfolio.”
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