For voting advice, don’t consult your 401(k)

We as Americans have a lot on our minds with the approaching election. Who will get the economy going again? Who has the best plans for health care and for controlling COVID-19?

What’s going to happen to my 401(k)?

There’s climate change and immigration and general urban unrest.

And, really, what will happen to my 401(k)? Asking here for all fortunate enough to have one.

It’s important, which we know because President Trump talks about it all the time. “You want to raise taxes? This whole thing — your 401(k)s will drop down to nothing, and your stock market will drop down to nothing,” he said July 2. Four days later, he tweeted that Joe Biden would make your 401(k)s “disintegrate and disappear.” At the Republican convention, he said Biden “has pledged a $4 trillion tax hike on almost all American families, which would totally collapse our rapidly improving economy, and once again record stock markets that we have right now will also collapse. That means your 401(k)s. That means all of the stocks that you have.”

Many people are apt to discount Trump’s broadsides, but lingering doubts are natural. What does history say about stock performance during Democratic or Republican administrations? Can Biden’s agenda be dangerous when the economy is so sickly? Read on for a couple surprises.

As in prior election years, investment analysts are putting out commentaries on the subject. Of these, I find inspiration in one posted Aug. 25 by Jim McDonald, chief investment strategist at Northern Trust. The conclusions are not unique to him, but I give him and his team props for being thorough and dispassionate. I also like quoting someone from a Chicago company who’s not in an East Coast bubble.

Going back to 1946, the analysis finds little meaningful correlation in stock returns and party control of the White House. Democrats will point out that during their presidencies, the average return of the S&P 500 has been 10.5% vs. 6.5% for the Republicans. But a small set of data limits the conclusions and Republican performance was hurt by negative returns during the times of George W. Bush, whose terms were bracketed by 9/11 and the Great Recession, and Richard Nixon, whose enemies list left off himself.

McDonald looked deeper to consider the power-sharing between the president and Congress. By this measure, Republicans did best, with an average S&P return of 15.7%, when they had the White House and at least some control in Congress. Democratic presidents had their best returns when at least one congressional chamber was ruled by Republicans.

“The reality is that none of these combinations have been frequent enough to be statistically reliable,” McDonald wrote.

Wall Street gets a bad rap for being too focused on quarterly profits. It’s a flawed human endeavor, going too crazy on the ups and downs, but stocks for the most part reflect a consensus about the near future. When new information comes in, markets change course, sometimes drastically. Investors read the polls that are in the news, so McDonald said they are factoring in good odds for a Biden victory. But control of the Senate is in doubt, and McDonald reminds us that Hillary Clinton had a similar polling lead four years ago.

As to the Biden tax plan and its $4 trillion price tag, McDonald is serene. He wrote that because of the virus, our economy’s problem is demand, not supply. You solve that by encouraging consumption, which Biden would do by adding $7 trillion to federal spending to pump out a stimulus. There is no such thing as a deficit hawk in today’s crisis and in today’s Washington. “The increased debt levels are likely only going to be a problem should interest rates jump, which we do not see over the next five years,” McDonald wrote. “In summary, worries that higher taxes, as currently proposed, would clobber economic growth may be overdone.”

If you still wonder about the election and investments, McDonald suggests sectors that a Biden win might help or hurt. His winners include utilities, health care and information technology, with losers including energy, the big banks and big pharma.

But this becomes a guessing game. Brett Arends, writing at MarketWatch, said tech stocks, the kind the president likes to bash, have been gainers in the Trump years. The biggest loser? Coal. Who’d a thunk it?

So maybe like TV ratings and crowd sizes, 401(k) balances ought to take a back seat to other concerns. You know, things like injustice, environmental harm, a nation slouching toward autocracy. Add those together and my guess is the result is something that’s not a bull market.