Elec­tions may mean gains for 401(k)s

His­tory shows Dow ral­lies af­ter midterms

USA TODAY International Edition - - MONEY - Adam Shell

As stock mar­ket re­ac­tions go, the rally on Wed­nes­day fol­low­ing news of a di­vided U.S. govern­ment was about as far from a scary Brexit-like mo­ment as you could get.

Power, pol­i­tics and money col­lided fol­low­ing Tues­day’s midterm elec­tions, as the Democrats snatched back con­trol of the House, prompt­ing stocks to do what they have his­tor­i­cally done once elec­tion un­cer­tainty fades and clar­ity over the out­come emerges.

They rose. The Dow Jones in­dus­trial aver­age and broader Stan­dard & Poor’s 500 in­dex each ral­lied more than 2 per­cent on Wed­nes­day, the first full day of trad­ing fol­low­ing the midterms.

“Mar­kets like cer­tainty, which we now have, and the split re­sult is what (Wall Street) ex­pected,” says Thorne Perkin, pres­i­dent of Pa­pa­markou Well­ner As­set Man­age­ment in New York.

So what comes next for mar­kets? And what does the shift­ing po­lit­i­cal land­scape mean for 401(k) in­vestors and their money?

Look­ing at the big pic­ture, his­tory shows the midterm elec­tions act as a launch­ing pad for stocks. The S&P 500, for ex­am­ple, has been higher a year af­ter ev­ery midterm elec­tion since World War II. It’s been a per­fect 18 for 18.

And over the past 50 years, the large-com­pany stock in­dex has risen an aver­age 16 per­cent in the year af­ter a midterm vote, Cap­i­tal Eco­nom­ics says.

The Dow also tends to go into rally mode af­ter the midterm votes are counted. The blue-chip stock aver­age has risen 4 per­cent, on aver­age, in the fourth quar­ter of midterm years and fol­lowed that up with gains of 5.2 and 3.6 per­cent in the fol­low­ing two quar­ters, ac­cord­ing to LPL Re­search. That nine-month stretch is the best of the four-year “pres­i­den­tial cy­cle.”

“The out­comes (of the midterms) mat­ter less than the end of the cam­paign,” ex­plains Kate Warne, mar­ket strate­gist at Ed­ward Jones.

Even though Repub­li­can Pres­i­dent Don­ald Trump’s col­leagues in the GOP lost con­trol of the House, di­vided govern­ment, Wall Street his­tory shows, can lead to strong mar­ket re­turns. That’s mainly be­cause leg­is­la­tion that might get in the way of eco­nomic growth or make it harder for com­pa­nies to make money never gets passed.

“His­tor­i­cally, di­vided govern­ments have been good for mar­kets,” says Brad McMil­lan, chief in­vest­ment officer at Com­mon­wealth Fi­nan­cial Net­work.

Why? “There’s no real pol­icy changes, as Repub­li­cans and Democrats can’t agree on much,” he says.

The new bal­ance of power in Wash­ing­ton, D.C., points to­ward a pos­i­tive mar­ket re­ac­tion. The S&P 500 has gained 10.8 per­cent, on aver­age, when there is a Repub­li­can pres­i­dent and the break­down in Congress is a Repub­li­can-con­trolled Se­nate and a Demo­crat-led House, data from Strate­gas Re­search Part­ners show.

JUSTIN LANE/EPA-EFE

Wall Street in­vestors saw the Dow surge more than 545 points Wed­nes­day.

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