Midterms, Volatility and the Muddle-Through
With much of the latest Federal Reserve debate now well-rehearsed, we believe markets may increasingly turn toward the midterms that are about six weeks away. Republicans hold a narrow House majority and a 53-47 Senate advantage, where Democrats would need a four-seat gain to take control.
The investment implications are less straightforward than the political headlines suggest. Unified Republican control could preserve policy momentum while keeping deficits, tariffs, inflation and longer-term rates in focus. We believe a divided government could constrain major legislation and create friction around investigations, spending deadlines, nominations and executive action.
The rise in Treasury yields over the past two days adds another dimension. The 10-year yield moved decisively back above 5% after September business surveys showed the strongest expansion in more than five years, alongside renewed input-cost pressures, while weak demand at the five-year Treasury auction reinforced concerns about supply and term premium. Strong growth remains supportive of earnings, but it also reduces the Federal Reserve’s flexibility, raises financing costs and increases the discount rate applied to future corporate profits. For equities, that combination does not necessarily imply recession or a sustained bear market, but it narrows the margin for error-particularly for highly valued companies whose expected profits lie further in the future.
History suggests that political disruptions have a way of working themselves through the system. Markets eventually can return to earnings, liquidity, rates, and growth. That leaves a credible muddle-through scenario: positive but uneven equity returns, periodic pullbacks and recurring volatility-without requiring a sustained bear market. Similarly, some warnings of an existential AI crisis echo the ineffective fearmongering seen in earlier cycles. That does not mean the risks are not real. We believe it means their more likely market expression may be bouts of overreaction and sharp volatility spikes rather than a disastrous, uninterrupted decline.
So many commentators and strategists remain focused on making the correct market call and predicting the eventual endpoint. We continue to believe there can be considerable value in managing the volatility of the ride itself-seeking to improve the quality and consistency of returns rather than relying entirely on one directional forecast. We believe a risk-managed equity approach does not require a particular election result, or a market collapse to demonstrate its intended characteristics. By seeking to maintain meaningful equity participation while carrying explicit downside protection and using option premium to help offset the continuing cost of that protection, we believe the approach may be well suited to an environment of recurring corrections, elevated option skew and recoveries between periods of stress.
The interaction with rates may ultimately matter more than the final seat count. Political friction accompanied by persistent inflation, heavy Treasury supply, or a higher term premium could make protection more valuable. Conversely, moderating inflation, easier monetary policy and accelerating earnings could allow markets to look through Washington entirely. The broad range between those outcomes-and the bond market’s increasing sensitivity to each new data point-remains the central volatility story, yet one that appears too often overlooked and insufficiently reflected in current market pricing.
NOTES
Congressional party balances are based on information from the Office of the Clerk of the U.S. House of Representatives and the U.S. Senate. The discussion of competitive Senate races and the four-seat threshold is informed by Reuters reporting dated September 7, 2026. Federal Reserve references reflect the September 16, 2026 FOMC statement. Recent economic and interest-rate observations reflect the September 23, 2026 S&P Global Flash U.S. PMI and contemporaneous Treasury-market reporting. Political and market observations represent the author’s analysis as of September 24, 2026.
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NOTES
Congressional party balances are based on information from the Office of the Clerk of the U.S. House of Representatives and the U.S. Senate. The discussion of competitive Senate races and the four-seat threshold is informed by Reuters reporting dated September 7, 2026. Federal Reserve references reflect the September 16, 2026 FOMC statement. Recent economic and interest-rate observations reflect the September 23, 2026 S&P Global Flash U.S. PMI and contemporaneous Treasury-market reporting. Political and market observations represent the author’s analysis as of September 24, 2026.
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