With just over a week to go before the US midterms, investors have started to hoard cash and buy insurance to hedge against a sharp sell-off on Wall Street if the Democrats take control of both houses of Congress.
While the result of the general election – held at the midpoint of a president’s four-year term – is not expected to trigger an immediate market reaction, fund managers are concerned that the November 3 vote could unsettle an already jittery sharemarket as investors weigh the risks of a divided or fragile government and the subsequent shift in policy.
“We haven’t been as long equities as we could be,” said John So, the co-founder of VP Capital. “We have a bit more dry powder to see how the market’s going to react.”
The Melbourne-based money manager said he was steering clear of high-growth businesses, which are often found in the technology sector, even though he believes such companies could also rebound if the election ends in political deadlock or a Democratic sweep.
September and October typically mark a volatile period for equity markets in the lead-up to the midterms, but history shows that the sharemarket tends to climb in the 12-month period that follows. According to Fidelity, the S&P 500 Index has delivered positive returns for 95 per cent of the time over the past seven decades.
Even so, fund managers are still cautious, particularly given US President Donald Trump’s low approval rating since he returned to the White House in 2024 has given the Democratic Party a real chance of a clean sweep.
Republicans began the election cycle with a solid 53-47 Senate majority, but national polling show the Democrats hold a consistent lead and party strategists are growing more optimistic on the prospect of flipping the Senate.
For now, VP Capital is playing it safe by holding more cash and waiting for the dust to settle, acknowledging that a market sell-off is a genuine risk.
“The Democrats are probably going to be less supportive of tax cuts and policies that benefit big corporations,” So said.
“They’re probably more cautious around investment into technology infrastructure and artificial intelligence, wanting more guardrails, and that may slow down investment and make investors rethink their positions.”
The election arrives just as Wall Street has come under pressure from a resurgence in the oil price, surging bond yields and a sell-off in the tech sector as confidence in the AI trade continues to falter.
Trump has also suggested this week that US strikes on Iran could resume after the election, which could trigger a further spike in the oil price that has already forced central banks to raise interest rates.
To hedge against further market turbulence, Schroders has bought some insurance “just in case”, according to Sebastian Mullins, the investment giant’s Australian head of multi-assets.
His team has been buying put options – a financial contract that gives the holder the right to sell an underlying asset at a set price – that would protect against a sharp decline in the S&P 500.