Portfolio managers move to cash

Investors anticipating Democratic gains in November elections

NEW YORK (Reuters) – The likelihood of a Democratic party takeover of at least one house of the US Congress in the midterm elections in November is prompting some portfolio managers to move more money to cash and rotate away from sectors like financials and technology that could see greater regulatory scrutiny.

Fund managers from Federated Investors, OppenheimerFunds, and BMO Global Asset Management are among those who are repositioning their portfolios and seeing cash as more attractive with the November 6 elections less than 100 days away.

Chief among their concerns: a so-called Blue Wave of Democratic victories could end the Republican Party’s single-party control of the White House and Congress, leading to both more investigations into possible abuses by the Trump administration and more stock market volatility.

“The reason for our concern very simply is that Democratic voters are very engaged and likely to come out in force, and the party in power typically does not do well in the first midterms,” said Phil Orlando, chief equity market strategist at Federated Investors in New York.

Such a move would also embolden Democratic presidential candidates to run on a platform in 2020 calling for universal health care, increasing the minimum wage, and repealing the Republican-led corporate tax cuts passed in December, all of which could slow economic growth, he said.

Concerns about a resounding Democratic victory prompted Orlando to sell some of his US stocks in late June, leaving his equity still overweight toward US equities but down from 8% to 5%, and move those assets into cash.

Orlando expects that the US stock market will tumble at least 10% between late August and September as the broad market starts to price in Democratic gains in Washington, he said.

Real Clear Politics, a polling aggregation site, has Democrats leading by percentage points on a generic ballot, but rates the chance of a Democratic takeover of the House as a toss-up.

Democrats would need to retake 23 seats to gain a majority in the House, and 2 seats to control the Senate.

Of the 36 Senate seats being contested, only 9 are currently held by Republicans, and 10 Democratic incumbents are running for reelection in states won by President Trump.

There are few signs in financial markets, so far, that Wall Street expects the economy to stall if the Democrats were to regain control of at least one house of Congress.

The US benchmark S&P stock 500 index is up 5.2% for the year, and has gained nearly 9% since its lows in early February.

The US economy grew at an estimated 4.1% in the second quarter this year, the Commerce Department said July 27, its fastest growth rate since 2014.

Yet a victory by more progressive Democrats in the midterm elections could lead to a greater regulatory focus on financial and technology firms that have so far received a pass from the Trump administration, said Jon Adams, senior investment strategist at BMO Global Asset Management,

A victory by progressive Democrats may also lessen the likelihood of a bipartisan deal on infrastructure and strengthen calls for reversing corporate tax cuts, he said.

“The Democratic Party is struggling with the same issue that Republicans have dealt with, which is having two parties within one party,” he said.

“We think the economic outlook for the next 18 months is still very strong and a lot of that is due to the fiscal stimulus” of the Republican-led tax cuts, he said.

Even if Republicans do retain one or both houses of Congress, there is little likelihood that the so-called “Trump trade” will come back in force, said Brian Levitt, senior investment strategist at OppenheimerFunds.