The midterm elections are officially behind us. As ever, some Americans are disappointed and concerned by the results, while others are elated. Either way, there are often strong feelings that accompany political outcomes, which tends to not be great for investment decision-making.
I was particularly taken aback by a recent survey conducted by the Nationwide Retirement Institute. They surveyed over 2,000 investors with at least $10,000 in investable assets and found that 40% of respondents altered their investment allocations ahead of the midterms. Three-quarters believed the outcome could meaningfully affect their long-term financial plans, while 56% said the election was making them more anxious. Gen Z investors were more than four times as likely as Baby Boomers to have changed course.1
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The survey alone cannot tell us whether each allocation change was appropriate given the respondent’s goals and financial situation. But in my reading of the data, and given my long-time experience with behavioral economics, it seems to me that feelings about politics were the main driver of these portfolio changes. In most cases, that’s not a prudent approach to making investment decisions.
But it’s also not so surprising. We have long understood that people tend to align their political outlook with their investment outlook. A recent working paper from researchers at the University of Arizona, the University of Southern California, and Colorado State University studied more than 12,000 Americans between 2015 and 2025. Across the change in administrations following the 2024 election, the most ardent supporters of the incoming president’s party went from assigning roughly a 35% probability to stocks rising over the next year to approximately 65%. Supporters of the opposing party had the opposite reaction.2
Perhaps more surprisingly, the relationship was stronger among respondents with greater financial literacy and stronger numerical skills.2 The researchers suggest that knowledgeable investors can become especially effective at constructing arguments that support their existing political views. That is a finding worth remembering before any of us assumes experience makes us immune to this bias.
I think the lesson applies equally to political enthusiasm and political disappointment. Confidence in an election outcome can encourage excessive risk-taking, while disappointment can make sitting on the sidelines feel prudent. Either response can allow personal feelings to take precedence over the investment case, which, again, is rarely a good outcome for the investor.
To be fair, an election can and perhaps should change expectations about taxes, regulation, and government spending. But translating those expectations into legislation, business decisions, and corporate profits takes considerably more work. And in a government where Congress and the executive branch are controlled by opposing parties, that work can be particularly challenging. Veto power can neutralize most, if not all, major legislative efforts.
It follows that investors positioning around anticipated policy changes are making, in my view, too many forecasts at once: what will pass, how businesses will respond, and how much of the expected benefit is already reflected in stock prices. Those are simply too many assumptions to bake into an allocation decision.
When stepping back and thinking about the current setup in the U.S. government, history offers some useful perspective on the period we are entering. Across presidential cycles from 1928 through 2023, the S&P 500 averaged roughly a 14% price gain in the third year of a presidential term—the calendar year following the midterms. That was the strongest average of the four years in the cycle, even before including dividends.
If you consider the certainty of the outcome, the legislative gridlock that seems likely to ensue, and the ongoing nominal GDP growth and earnings growth, I see more tailwinds than headwinds looking ahead. The political cycle is noisy, but remember that businesses continue developing products, serving customers, and competing for profits through changes in government.
Bottom Line for Investors
In my view, regardless of the outcome, one constructive development is that the election itself has been resolved. Businesses and investors can assess a clearer political landscape, with fewer possible electoral outcomes to consider.
I would also be cautious about assuming that campaign promises will quickly become sweeping legislation. Measures the president opposes face his veto power, and overriding a veto requires two-thirds of those voting in each chamber of Congress. That creates a substantial obstacle to legislation when Congress and the White House disagree, although executive and regulatory actions remain separate considerations.
There will be time to evaluate specific policies as they develop. For now, greater clarity about the political landscape can be helpful even to investors who dislike the outcome.
Election results can make you question what comes next for your retirement. Before making portfolio changes, consider how they fit your income needs, time horizon, and tolerance for risk. Our complimentary guide, Retirement Made Easy3, explores these planning considerations to help you keep your retirement goals in focus.
It includes:
Explore our step-by-step guide to help bring your investment strategy and retirement income needs into focus.
Download your free guide: Retirement Made Easy
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