John Fetterman speaks during an election night rally in Pittsburgh on Nov. 9 after defeating Republican television celebrity Mehmet Oz in one of the country's hardest fought Senate contests. Photographer: Justin Merriman/Bloomberg

Midterm elections can stir up worries about what a changing of the political guard will mean for retirement portfolios, but they're also a rare opportunity for advisors to gain fresh insights into clients' thinking.

So says John Diehl, senior vice president of applied insights at investment firm Hartford Funds, which has roughly $117.8 billion in assets under management. Diehl, who speaks often to his firm's advisors and their clients about the psychology of investing, said that elections present a chance to get to know a client a bit better than might be possible at other times.

People who show a keen interest in politics are often eager to talk about current events. The open-ended discussions can lead down all sorts of paths.

"The emotions surrounding elections, these can be kind of a lead-in into someone's worldview," Diehl said. "Not every advisor is open to doing this. But there is an opportunity to try to understand the client's story a bit more, to try to understand if there was a triggering event, an experience that shifted their political views one way or another."

That's not to say, Diehl added, that he would recommend one investment strategy to clients who are Democrats and another to those who are Republicans. Still, chats about hot-button political issues can help an advisor gauge a client's likely interest in putting money into something now politically fraught, like a fund invested according to environmental, social and governance principles.

Diehl said that an advisor's job at election time is often to act as a "circuit breaker." Clients will frequently come in with worries that a change in Congress and the White House will lead to a round of regulation, deregulation or tax changes that affect the companies they've invested in.

"They are usually unhappy with the volatility and unpredictability of elections," Diehl said.

A survey Hartford Funds conducted in October of 874 people with $100,000 or more to invest found that nearly 90% of the respondents believed the midterms would affect their portfolios in some way, but only 38% planned to make changes. The data also suggested that younger people were more likely to change their investing plans in response to the election outcome.

The Nov. 8 midterm election saw Republicans make some expected gains in the House, but not quite as many as some polls had originally suggested . Control over the closely divided Senate remains up in the air, with a runoff contest now scheduled between Georgia Democratic incumbent Raphael Warnock and his Republican rival Herschel Walker.

An online posting by two Morgan Stanley researchers — Michael Zezas, the head of global thematic and public policy research at the firm, and Seth Carpenter, global chief economist — suggested that a strong showing by Democrats could undermine the notion that "that inflation is an electoral liability" for the party.

"Investors could see this result as permission for the party to ease the political and legislative constraints that kept Congress from enacting some of the fiscally expansionary policies that were part of President Biden's original "Build Back Better" agenda," they wrote.

Investor anxieties tend to be less pronounced in midterms and more so when presidential candidates are on the ballot. In the latter contests, attention is intensely centered on the policies of two prominent national candidates and the likely ramifications of either one winning. But whether the contests are presidential or midterm, the outcomes rarely make much of a difference for investors' portfolios , Diehl said. That's especially true at times like now, with the likelihood of a divided government making the chances of sweeping changes at the federal level slim.

More consequential are longer-ranging trends in federal policy and the general state of the economy. Polls suggested that the economy was top of mind for many of the voters who cast ballots in this year's midterms. Diehl said clients are much more on the right track when they wonder how things like inflation, the Federal Reserve's aggressive policy on interest rates and the prospects of a recession will affect their portfolios. But that doesn't mean they should make knee-jerk changes in their holdings.

"We all know that emotions and investment decisions don't always make the best match," Diehl said. "The best approach is still diversification. That's why we want to make sure clients came into this election season with a well-allocated portfolio."

That stay-the-coursel advice figured prominently in a webinar on Nov. 7 by the data and analytics firm VettaFi, with investing professionals arguing that history suggests stocks will see a little rise after the midterm dust settles.

Matthew Bartolini, a managing director at the investment firm State Street Global Advisors, told the webinar that the S&P 500 had shown growth following almost every midterm election held in the past 80 years. That was even the case following the 1978 midterm, when the country was similarly faced with the prospects of high inflation and a looming recession. Bartolini said that although any bump most likely won't be as strong this time as in years when the economy was in a better place, he wouldn't be surprised to see one.

Jonathan Boyar, the managing director of the New York-based investment firm Boyar Asset Management, agreed that stocks could be in for a lift.

"We would not be surprised to see a fourth-quarter rally, as the US equity market is giving every impression of being majorly oversold at present, but investors should temper their expectations in the face of many near-term headwinds, including the war in Ukraine, a hawkish Federal Reserve, ongoing supply chain concerns and continuing high inflation," he said in email comments.

Rather than trying to predict how politics will affect portfolios, Boyar said, clients should "keep their emotions in check and focus instead on the fundamentals of the companies they own or would like to buy."

Another speaker during the webinar, Adam Grossman, the global equity chief investment officer at Richmond, Virginia-based RiverFront Investment Group, said that a divided government could set the stage for stock volatility in at least one way. A political fight over the U.S.'s debt ceiling — Congress's self-imposed limit on how much the federal government is allowed to borrow — is looming next year. The current ceiling stands at $31.4 trillion, while the national debt is at $31 trillion. Republicans have said they will use the threat of allowing the government to default on its debt, if the ceiling is breached, to press for their policy priorities in negotiations with President Joe Biden.

To be sure, lawmakers have before threatened to allow a default before only to back off at the last minute.

Still, "there will be political theatrics around the debt ceiling," Grossman said. "And that will cause near-term volatility."

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