Elections are right around the corner. Many 401(k) advice clients have been asking me what the results could mean for stocks and bonds.
In this article, you will learn two main facts about how the midterms affect the markets. And one important tip to remember regardless of which party wins in November.
The stock market has not fared well during midterm-election years. It should come as no surprise that the markets have struggled of late. The S&P is currently down 22% for the year, putting us well into bear market territory.
Why do the markets tend to slide before the midterms? It all comes down to a single word: Uncertainty.
As you can imagine, the months leading up to a midterm come with a lot of questions. Which party will control Congress come November? What new legislation can we expect? How will the results affect our taxes, healthcare, and budget?
This year there is even more uncertainty. Thanks to rising interest rates and the fear that they might trigger a recession.
The stock markets, of course, are allergic to uncertainty. It is the driving force behind many a stock market pullback. So much uncertainty before a midterm election. It is no surprise the stock markets struggle.
So, that is the first thing to know. There is good news. The stock markets enjoy a major rally in the year after a midterm election. Regardless of which political party is in power.
2023 will be the third year of President Biden’s term.
If you think about it, this makes sense. After an election, uncertainty begins to fade. Investors gain a better idea of which party holds the cards and what their agenda will be.
Uncertainty drags the stock market down before an election. The eventual resolution of uncertainty often pushes the stock markets back up!
That is the second thing to know. Past investment performance does not guarantee future results. So, while the markets have tended to climb after the midterms, there is no guarantee that they will this time.
Stock market volatility is never pleasant. But. is also never permanent.
Remember to never make financial decisions based on politics. Politics plays a role in investment management decisions. But the comings and goings in Washington is not at the top of the list.
Corporate earnings, supply and demand, interest rates are far more important. It is true that the government has an influence on many of those things. But the government does not dictate the daily rhythm of the stock markets.
So, whether you are a Republican, a Democrat, or an Independent. Remember the way to reach your retirement goals is by having a sound 401(k) investment strategy. Make informed decisions. And take emotion out of investing.
One last thing. Do not worry about the election.
Ric Lager
Lager & Company, Inc.
