The S&P 500 Is Down 4% in 2026. Here's What to Do With Your 401(k)

After three consecutive years that looked almost too good — roughly 24% in 2023, 23% in 2024, and 16% in 2025 — the S&P 500 opened 2026 by going the other direction. As of April, the index is down about 4% for the year. The VIX, Wall Street's "fear gauge," has been elevated. Tariff uncertainty, geopolitical tension, and concerns about AI investment valuations are all showing up in the numbers.

And the worst part, if you're an ordinary retirement saver, is that your 401(k) balance is probably lower today than it was on January 1st.

Here's what the data actually says you should do about it.

The Honest History of Market Pullbacks

Before anything else, let's look at what we know.

The S&P 500 has experienced a 10% or greater drawdown — what analysts call a correction — in roughly 34 of the last 94 years, or about once every three years on average. It has experienced a 20% or greater decline (a bear market) about once every 7 to 10 years. Every single one of those corrections and bear markets was eventually followed by a recovery to new highs.

Not most of them. All of them.

The investors who got hurt — really hurt, not just temporarily rattled — were the ones who sold during the down period and waited for "the right time" to get back in. The problem with that strategy is that the best days in the market tend to cluster around the worst days. Missing just the 10 best trading days in a 20-year window cuts long-term returns roughly in half.

A 2026 market that's down 4% isn't cause for action. It's noise.

What the Midterm Election Pattern Says

There's an interesting historical pattern worth knowing about. CNBC strategists noted this in early April: the S&P 500 typically experiences its most pronounced volatility during midterm election years. November 2026 is a midterm. The pattern, which has held across multiple decades, involves elevated volatility in the first half of a midterm year, followed by a recovery rally in the second half.

This isn't a guarantee of anything. Markets don't follow calendars. But it's a useful frame: if you're seeing volatility in Q1 and Q2 of 2026, this is consistent with a pattern that has historically resolved itself by year's end.

Three Things You Actually Should Do

Keep contributing — especially now

If your 401(k) contributions are set to a fixed percentage of your paycheck, keep them there. If you've been meaning to increase your contribution rate, now is actually a better time than when the market was near its highs.

Here's why: when markets are down, your regular paycheck contributions buy more shares of the funds you're invested in. If a S&P 500 index fund that was at $450/share in January is now at $432, each $100 you contribute buys a few more shares than it did before. When the market recovers — and historically, it does — you've accumulated more shares at lower prices.

This is called dollar-cost averaging, and it's one of the genuine advantages of consistent 401(k) contributions through market cycles. The market pullback is working for you right now if you're still contributing.

Check your asset allocation — not your balance

There's a difference between looking at your 401(k) to check whether your portfolio is appropriately diversified for your timeline and looking at it to feel bad about the balance being lower.

The question that matters: is your stock-to-bond ratio appropriate for how many years you have until retirement?

A rough framework used by many financial planners:

30+ years to retirement: 90 to 100% stocks, primarily broad index funds
20 to 30 years out: 80 to 90% stocks, 10 to 20% bonds
10 to 20 years out: 70% stocks, 30% bonds
5 to 10 years out: 60% stocks, 40% bonds
Within 5 years of retirement: 50% or less stocks, increasing bonds and cash

If you're 35 years old with 30 years until retirement and you're 90% in equity index funds, the fact that the S&P 500 is down 4% this quarter is genuinely not a problem. It's market noise that your timeline will absorb many times over.

If you're 62 and retirement is next year, a 4% drop matters more — but in that case, you should already be positioned conservatively enough that a single bad quarter doesn't derail your plan.

Rebalance if you've drifted significantly

If you've never looked at your 401(k) allocation settings and just left the default from when you were hired, now is a reasonable time to check. Many employer-chosen defaults invest contributions in something like a target-date fund (e.g., "Target Date 2045 Fund"), which automatically adjusts the stock/bond mix as you approach retirement. If that's what you have, you probably don't need to do anything.

But if you've made manual allocation changes over the years and haven't looked since, run the numbers. If a 70/30 stock-bond split has drifted to 80/20 after years of stock gains, a period of market weakness is actually a natural time to rebalance back toward your target without triggering a dramatic buy/sell at a single price point.

The 401(k) Moves That Look Smart but Aren't

Switching to "safer" investments after a loss. Moving your 401(k) from equity funds to money market funds or stable value funds after the market drops locks in the loss and removes you from the recovery. This is the classic buy-high-sell-low trap. At a 22% total drop in 2022, millions of Americans moved to cash — and missed the 26% rebound in 2023.

Temporarily stopping contributions. Every paycheck you skip is a contribution that can't be made up later. If your employer offers matching contributions, stopping contributions means leaving free money on the table on top of missing the investment.

Checking your balance daily. This is the most underrated piece of advice in investing. Your 401(k) is a 20 to 30 year instrument. Checking it daily introduces emotional decision-making into a process that should be automated and ignored. Log in quarterly. Rebalance annually. Otherwise, let it compound.

Cashing out when changing jobs. If you change employers this year, resist the temptation to cash out your old 401(k). The IRS takes 20% withholding immediately plus income taxes and a 10% early withdrawal penalty if you're under 59½. On a $30,000 401(k), you could lose $9,000 to $12,000 in a single transaction. Roll it directly into your new employer's 401(k) or an IRA instead.

What About IRAs in This Environment?

If you have a Roth IRA or traditional IRA alongside your 401(k), the same principles apply: contribute consistently, stay invested, don't react to short-term moves.

One exception: if you converted a traditional IRA to a Roth IRA during a period of market decline, the taxable amount of the conversion is lower because your balance is lower. A market downturn is actually a favorable time to consider a Roth conversion, since you're paying taxes on a smaller number. This is a more advanced strategy worth discussing with a tax advisor, but it's worth knowing about.

The Roth IRA contribution limit for 2025 (which you can contribute to until April 15, 2026) is $7,000, or $8,000 if you're 50 or older. If you haven't maxed out your 2025 contribution, you still have time.

The Bigger Picture

The 50/30/20 budget framework designates 20% of take-home income for savings and investments. In practice, what that 20% should be doing:

First, build a 3 to 6 month emergency fund in a high-yield savings account. Second, contribute enough to your 401(k) to get the full employer match — that's a 50 to 100% return on investment, unbeatable anywhere. Third, eliminate high-interest debt. Fourth, max out a Roth IRA. Fifth, increase 401(k) contributions beyond the match. Sixth, invest in a taxable brokerage account.

Most Americans are somewhere in the middle of that order. A 4% market pullback doesn't change the order. It doesn't change the math. The fundamentals of long-term investing are simple precisely because they're designed to survive these moments.

For a deeper explanation of how index funds work inside 401(k)s and why they outperform most actively managed alternatives, see our beginner's guide to index fund investing.

Frequently Asked Questions

Should I pause my 401(k) contributions during a market downturn?

No. Pausing contributions means buying fewer shares when prices are lower — the exact opposite of what benefits you. Consistent contributions through market downturns are one of the most effective strategies in long-term investing.

My 401(k) dropped $12,000 this quarter. What should I do?

Sit with the discomfort and do nothing. A paper loss is only a real loss if you sell. If retirement is 20+ years away, that $12,000 decline will statistically be a rounding error in your overall retirement picture. The biggest risk isn't the decline — it's an emotional decision made in response to it.

When is a good time to invest a lump sum?

The classic research on this question consistently shows that lump-sum investing outperforms gradual "dollar-cost averaging" of a lump sum about two-thirds of the time, because markets are up more days than they're down. The practical answer: invest it as soon as you have it, and don't wait for the "right moment" that never quite arrives.

For context on what your 401(k) investments are actually doing inside the fund, and why index funds are the recommended starting point for most investors, read our index fund investing guide. If market volatility is causing you to rethink your overall financial plan, start with our 50/30/20 budget framework to make sure the foundation is solid.