Midterm Election Showdown:
Political Collapse and a Coming Market Reckoning?
By Victor Sperandeo with the
Curmudgeon
Introduction:
The prevailing assumption among many traders and investors
has been that President Trump would do whatever necessary to keep the stock and
bond markets strong heading into the November 3, 2026, U.S. midterm elections. The performance of the U.S.
dollar and Bitcoin have
also figured into this political and economic calculus. That
assumption may prove badly misplaced!
Heading into the midterms, the dominant pain points for
voters center heavily on economic anxiety, government ethics, and highly
contested domestic and foreign policies.
According to tracking polls from organizations like the Pew
Research Center and Gallup, the top national concern is the overall
cost of living. This economic strain is driven directly by continuous struggles
with inflation, high grocery bills, housing costs, and rising gas and energy
prices linked heavily to the ongoing U.S. war with Iran. Beyond immediate household finances, a vast
majority of voters express profound disillusionment regarding government
corruption, followed by significant partisan concern over the cost and
accessibility of healthcare, shifting domestic immigration enforcement and
deportation strategies, and emerging local anxieties surrounding lack of artificial intelligence (AI) regulation and data center construction.
Trump vs the Fed:
President Trump wants much lower short and long-term interest rates, which would boost the U.S. economy and financial markets. After appointing Kevin
Warsh as Fed Chair (confirmed by the Senate), Trump has been unable to bring
interest rates down. The debt markets
have kept long-term yields high, reflecting expectations for "higher
for longer" short term interest rates, persistent inflation, Treasury
borrowing needs, and the added compensation investors demand for holding
longer-term bonds. Heres why thats a problem
for the U.S. economy and thereby a top concern of voters:
Higher interest rates in the bond and money markets raise borrowing
costs across virtually every sector of the economy, from credit cards and
automobile loans to business financing and residential mortgages. This places a
significant financial burden on millions of consumers and businesses, slowing
economic activity and growth. For voters, elevated interest rates are
particularly unpopular because they make major life milestones and everyday
purchases more expensive. Higher mortgage rates further erode housing
affordability by increasing monthly payments, while expensive credit card
balances and auto loans strain household budgets. These pressures also
contribute to broader economic anxiety, particularly concerns about a recession
and weakening employment prospects.
Although higher interest rates
provide better returns for savers, the immediate and widespread financial
strain of more expensive consumer debt and high mortgage rates generally outweigh
benefits for savers.
Importantly, the Fed
exercises considerable influence through its public statements, a practice
traditionally described as "moral
suasion." Its words
can move Treasury prices and yields, sometimes more dramatically than actual
policy changes.
During Victor's 60 years in financial markets, he has rarely seen the Fed's communications exert such a powerful
influence on Treasury market pricing.
The Fed's emphasis has remained on a strong economy, labor-market stability, and
bringing inflation lower through monetary restraint. Yet its actual policy
actions have often been less consequential than its rhetoric in moving market
expectations.
Axel Merk of Merk Investments has observed that the Federal Reserve has the "big
bazooka." Its enormous balance sheet and capacity to influence financial
conditions give it extraordinary market power. While Warsh said he'd reduce the Fed's balance sheet (QT), that has not happened yet, and long-term interest rates remain at multi-decade highs.
-->As the public associates high long-term interest rates with persistent high inflation,
that's a big negative for the GOP in this Tuesday's elections.
A Republican Disaster in the Making?
Several well respected conservative
political commentators and pollsters are forecasting an extraordinary GOP
defeat in the midterm elections. Their argument is that the party faces an
unusual combination of political liabilities, even without the economy having
officially entered a recession. Heres one
from Robert Barnes, Are Republicans Losing Ground?
Rich Baris, who goes by the People's Pundit is a
well-respected conservative pollster who says Trump and the Republican Party are facing disaster on November 3rd. He has
identified four very important factors in determining election outcomes: 1.]
Iran War, 2.] Betrayal of campaign promises, 3.] Political scandals/corruption,
4.] Economic distress.
His contention is that a political
party facing two of these four conditions is likely to lose. In his assessment,
the Trump administration and the GOP are facing all four. Please consider the evidence behind Baris on
the mark opinions:
Iran War: The administration's military confrontation with Iran
has created substantial geopolitical and economic risks, including disruption
to energy markets and the possibility of a wider conflict.
Broken campaign
promises: Many of Trump's campaign commitments
have not been fulfilled. The promised border wall, for example, was never
completed as originally envisioned.
Scandals: The continuing controversy surrounding the Epstein
files has raised questions about transparency and the administration's
willingness to release information. Trump's relationships with wealthy and
influential individuals have also generated political controversy. His
cryptocurrency-related activities have raised additional questions about potential
conflicts of interest and personal financial gain.
Economic distress: Affordability has become a major political
vulnerability. Higher living costs, energy prices, housing expenses, and
borrowing costs have placed increasing pressure on American households. This is reflected in consumer confidence
near all-time historic lows.
Fergus McCormick, Senior Economist, Global Indicators, at the
Conference Board wrote:
Consumer confidence remained on the long-term downward trend thats
persisted over the past few years. Consumers planned less spending on services
and durable goods over the next six months. This likely reflected higher price
levels and persistent inflation, which eroded consumers purchasing power. Among write-in responses in October,
consumers continued to express frustration with rising costs. References to
prices, the high cost of food and groceries, and oil and diesel prices rose. Comments
about war and conflict eased for a second straight month but remained elevated.
Mentions of jobs and employment as an area of concern also ticked up, though to
a lesser extent.
Source: The
Conference Board
.
These conditions have led some
conservative pollsters to project a Democratic victory of approximately 250
seats in the House of Representatives and 5254 seats in the Senate. If those projections prove accurate, the
result would represent a major Republican political
defeat and a substantial shift in the balance of power in Washington.
What a Democratic
Victory Could Mean for the Markets:
The financial implications could be
very significant. Victor's expectation is that a major Republican defeat (Dems
win both the House and Senate) would initially create uncertainty across
several asset classes. Equities, the U.S. dollar, and Bitcoin could come under
pressure, while Treasury securities might benefit from a flight to safety and expectations
of weaker economic growth.
Precious metals could also experience
increased volatility. Gold and silver would have to balance competing forces: a
weaker dollar and heightened political uncertainty would be supportive, while
changing real interest rates and investor liquidity requirements could work in
the opposite direction.
The U.S. Treasury market deserves
particular attention. A political shock, combined with deteriorating economic conditions,
could produce a significant decline in yields and a corresponding recovery in
Treasury prices.
Potential Economic
Impact:
There is also a broader economic
risk. A new Congress controlled by Democrats would likely produce a prolonged
political confrontation with the Trump administration. Legislative gridlock,
investigations, policy uncertainty, and the 2028 presidential campaign could
dominate Washington.
Corporate America would not necessarily
escape the consequences. Higher taxes, additional regulation, antitrust
scrutiny, and increased litigation risks could affect business investment,
corporate earnings, and equity valuations.
-->The crucial question is whether
financial markets (especially equities) have adequately discounted these
possibilities. We dont think so!
The Republican
Party Has Abandoned Its Traditional Principles:
Victor has been a Republican throughout
his adult life, but he has never witnessed a political party commit what
amounts to political seppukuJapanese ritual suicideon such a scale.
The traditional Republican principles
of balanced budgets, limited government, fiscal discipline, sound money, and
free markets have been substantially displaced by political loyalty to one
individual. The modern, Trump-dominated
GOP has increasingly become a party defined by personality, confrontation, and political
grievance rather than consistent economic principles.
Its central political message has
focused heavily on immigration and border security, with the claim that
uncontrolled immigration threatens the country's economic and social stability.
Yet the party's performance on its own legislative priorities has been
disappointing.
For example, the SAVE Act,
which sought to impose additional citizenship documentation requirements for federal
voter registration, encountered substantial legislative obstacles.
Meanwhile, the administration's
cryptocurrency activities and the unresolved Epstein controversy have created
vulnerabilities that undermine its claims of political reform and transparency.
The Republican Party entered this
period with substantial institutional advantages. Yet its leadership has put
those advantages at risk through political miscalculation, internal divisions, and
an unwillingness to challenge the administration's most controversial
decisions.
If the Democrats were more
consistently committed to traditional American principles of fiscal
responsibility, constitutional government, and free markets, Victor believes
they might have an opportunity to win an even larger Senate majority. Unfortunately, neither party currently offers
much reassurance about the country's fiscal and institutional future.
Iran, Energy
Prices, and the Economic Consequences of War:
The military confrontation with Iran
represents one of the greatest economic risks facing the United States and the
global economy. The Strait of Hormuz
[1.] is a critical chokepoint for international
energy shipments. Any prolonged disruption threatens the flow of crude oil,
refined petroleum products, and other energy supplies.
Note 1. Curmudgeon/Sperandeo: Strait
of Hormuz Risk Premium: Uncertainty as an Asset Class
The resulting increases in crude oil,
gasoline, diesel, jet fuel, and marine bunker fuel prices would have
consequences extending far beyond the energy industry.
Higher energy prices increase
transportation, manufacturing, agricultural, and distribution costs. They
reduce household purchasing power and squeeze corporate profit margins. For an
economy already struggling with affordability, these pressures could be
particularly damaging.
The relationship between energy production
and economic growth is important. Oil is a fundamental input to modern economic
activity. A sustained reduction in available energy supplies, combined with
sharply higher prices, can restrain industrial production, consumer spending,
and GDP growth.
In that sense, an extended conflict
could become economically self-defeating. The longer energy disruptions
persist, the greater the risk of slower growth, rising inflationary pressures,
and eventually recession.
Let's give former U.S. President Obama
credit for pursuing a diplomatic agreement intended to prevent Iran from
developing nuclear weapons. The 2015 nuclear agreement may not have been
perfect, but diplomacy offered an alternative to military conflict.
There is an important distinction
between an imperfect diplomatic agreement and a war whose economic, military,
and geopolitical consequences may be extremely difficult to control. War is
rarely a cost-free solution to a geopolitical problem.
Little Bighorn: A Historical
Warning About Military Arrogance:
The Battle of the Little Bighorn
on June 25, 1876, provides a useful historical analogy for the dangers of
military overconfidence. General George
Armstrong Custer and elements of the U.S. Seventh Cavalry confronted a much
larger force of Lakota Sioux, Northern Cheyenne, and Arapaho warriors in
Montana. Custer divided his command into separate elements and attacked without
adequately understanding the strength and disposition of the opposing forces.
The result was catastrophic. Custer
did not respect his enemy. He and his
immediate command were annihilated, and the broader Seventh Cavalry suffered
heavy casualties.
The historical lesson is not simply
that a smaller force can defeat a larger one. It is that leadership arrogance,
inadequate intelligence, and failure to respect an opponent's capabilities can
produce disastrous consequences. The
analogy is relevant to the potential for an expanded U.S. military
confrontation with Iran.
Iran's geography, mountainous
terrain, military capabilities, and ability to threaten shipping through the
Strait of Hormuz present serious operational challenges. Any decision to
introduce American ground forces would require a realistic assessment of those
risks, not political rhetoric or assumptions about an easy victory.
Custer's defeat at Little Bighorn
remains a warning about what can happen when military leadership underestimates
its adversary and overestimates its own capabilities. It mirrors the
unrealistic view of the U.S. attacking Iran, without realizing it is an
unwinnable war, largely due to the landscape of the Islamic Republic. Please see End Quote below.
Only the U.S.
Congress Has the Authority to Declare War:
The U.S. Constitution gives
Congressnot the president acting alonethe power to declare war. That
constitutional safeguard reflects the Founders' concern about concentrating the
power to commit the nation to war in one individual.
The last formal declaration of war by
Congress occurred during World War II, following the December 7, 1941, attack
on Pearl Harbor. Subsequent American military conflicts have proceeded without
formal declarations of war.
If the Trump administration expands
its military involvement in Iran by deploying U.S. ground troops, the potential
consequences deserve exceptionally careful scrutiny.
Curmudgeon
Comments:
1.
The negative effects of the Iran conflict should not be underestimated.
Intermediate and long- term interest rates began to soar, along with oil prices
and inflation, after the United States and Israel attacked Iran on February 28.
By October 30th, the 10-year Treasury yield had climbed
97 basis points (from 3.97% to 4.94%), while the 30-year Treasury yield had
risen 67 basis points (from 4.64% to 5.31%).
Note that the 10 and 30-year Treasury yields were considerably higher (prices
lower) earlier in October until a flight to quality brought them down last
week.
The 10-year Treasury yield had risen
These substantial increases in
long-term borrowing costs added to the financial pressures facing consumers,
businesses and the federal government.
2. The potential for renewed military
action in the Middle East following the November 3rd midterm elections
represents another major source of uncertainty and risk for financial markets. Multiple
news reports indicate that the Trump administration is preparing for a possible
resumption of U.S. attacks on Iran shortly after the elections.
Although President Trump has not made
a final decision, U.S. officials have reportedly warned regional allies to
prepare for renewed military operations and possible Iranian retaliation. Any
escalation could send oil prices sharply higher, reignite inflationary
pressures, push Treasury yields higher, weaken equities and increase volatility
across global financial markets.
3.
The November 3rd election outcome adds another layer of
uncertainty: if Democrats gain control of both the House and Senate,
congressional opposition to Trump's military and economic policies could
intensify, potentially complicating his foreign-policy agenda. Investors will
therefore be watching both the election results and subsequent developments in
the Middle East as important catalysts for market direction.
Curmudgeons
Conclusions - Economic Fallout of Trump's Policies Weighs on the Midterms:
President Trump has made the November
3rd midterm elections a referendum on his administration. His broken
campaign promises, erratic leadership, corruption and attacks on democratic
institutions have undermined public confidence. But his economic record may
prove even more damaging to Republican candidates.
Trump's tariffs and decision to
launch a costly war with Iran have fueled energy-price inflation, raised business
costs and increased uncertainty. The resulting rise in Treasury yields has
pushed bond prices lower, increased mortgage and corporate borrowing costs, and
put additional pressure on an already overvalued stock marketparticularly
rate-sensitive technology and growth shares.
Republican congressional leaders
share the blame. Rather than challenge policies that threaten economic and
financial stability, they have largely enabled Trump's agenda. Investors now face
a damaging combination of rising federal debt, higher government interest
expense, persistent inflation risks and uncertainty over Federal Reserve
policy. Continued pressure on Treasury prices could further tighten credit
conditions, slow business investment and weaken economic growth.
Meanwhile, the Iran conflict
threatens oil supplies and keeps inflation expectations elevated, complicating
the Fed's ability to reduce interest rates. Trump's erratic trade and foreign policies
also risk undermining confidence in the dollar and strengthening demand for
traditional safe havens such as gold.
A Democratic takeover of Congress
would provide a much-needed check on U.S. presidential power and could limit
further damage to fiscal and economic stability. While it would not immediately
reverse Trump's policies, it could constrain additional tax cuts and deficit
spending, increase oversight of the executive branch, and reduce the risk of
further policy shocks.
Markets could respond positively to
greater institutional restraint, although continued political gridlock would
remain a risk. If the GOP suffers major losses on November 3rd,
responsibility will rest squarely with Trump: his leadership, his policies and
their consequences for inflation, interest rates, bond prices, the dollar and
the stock market.
Victors Conclusions - Political Risk, Energy Risk, and Market
Risk:
The November midterm elections could become
a defining political event for the Trump administration and the Republican
Party.
A substantial Democratic victory
would likely produce political gridlock, intensified investigations,
legislative confrontations, and an increasingly bitter struggle over the 2028
presidential election. Trump would face the prospect of losing control of Congress
and seeing his political legacy challenged.
For financial markets, the consequences could be substantial.
The combination of geopolitical instability,
energy-price shocks, deteriorating affordability, and political uncertainty
creates a potentially unfavorable environment for risk assets. Equities,
Bitcoin, and the U.S. dollar could face downward pressure, while Treasury
securities and precious metals would respond to changing expectations for
economic growth, inflation, interest rates, and investor demand for safety.
The ultimate economic danger is that
prolonged military conflict and higher energy prices could push an already vulnerable
economy into recession. Our central
concern is that political leadership is increasingly being driven by personal
ambition, partisan loyalty, corruption, and short-term electoral calculations
rather than constitutional principles and sound economic policy.
Markets eventually reflect economic
and political realities, regardless of the assurances offered by political
leaders or the Federal Reserve.
Investors should not assume that the administration can keep financial markets
strong simply because it has a political incentive to do so. The midterm
elections could expose just how fragile that assumption has become.
..
End Quote:
Wishing you good health, success and good
luck. Till next time
..
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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