Where do we go from here?

Jack Meskunas, managing director – investments, Oppenheimer & Co. takes a look at the US mid-term elections and captive portfolios.

For many years, politics played a limited role in discussions around asset management for captive insurance companies. Legislative actions – primarily related to taxation and enforcement – were the main areas of impact, while investment considerations were largely unaffected.

That dynamic has shifted. The past two administrations have taken a more activist approach towards business policy, using incentives and disincentives to influence corporate behaviour and investment decisions. They have wielded a heavy hand to manipulate or steer the economy, both domestically and globally. The “left” and “right” wing agendas – as they are called – were in many cases diametrically opposed, particularly with regards to their views on corporations (energy in particular), taxation and globalisation.

The all-important mid-term elections

As 2026 unfolds, attention is increasingly focused on the November mid-term elections. While the outcome is uncertain, big changes are likely regardless of the results. These elections could reinforce, stymie, or even potentially reverse, the Trump 2.0 agenda. Captive owners and managers should consider how each possible outcome might affect their businesses and, more importantly, their investment portfolios.

These elections will offer several potential outcomes. Let’s discuss each and their implications for captive insurance portfolios.

Scenario 1: Republicans sweep and increase their hold on the House and Senate

Although currently viewed as the least likely outcome, the history of American politics shows things can change right up until the last minute. Should Republicans strengthen their hold on both House and Senate, it will make it more difficult for the few defectors that they have had to dictate policy directions.

Under this scenario, the Trump administration will be emboldened and tariffs will remain a key policy tool. Regardless of the Supreme Court decision that “invalidated” the use of emergency declarations for sweeping tariffs, many sections of US law allow for the implementation of tariffs, albeit not as broadly as the “emergency” statute under which they were initially being imposed.

For captive portfolios, this would likely extend current market trends. Captives will need to review the companies they are invested in to ascertain which are likely to be most affected by tariffs as new tariff strategies and targets are rolled out. Shares of stocks (equities) and bonds (debt) from primarily domestic companies will likely outperform those of companies that rely heavily on imports. Conversely, companies with significant global sales could benefit from a weaker dollar, making their goods cheaper for foreigners to purchase. Unfortunately, the initial and likely response to US tariffs was anything from a cutback of purchases of US goods (think China and Europe), to an outright boycott (think Canada). Expect smaller and mid-capitalisation companies to continue to appreciate, building on the run that began in December 2025 as they play “catch up” to the valuations of their larger-capitalisation counterparts.

Despite the excessive volatility in 2025, the “red wave” scenario would undoubtedly be a continuation of what we've experienced under Trump 2.0. Portfolios that were realigned following the 2024 election would likely require minimal adjustment under this scenario.

Scenario 2: Divided control of Congress

A split Congress – where Democrats take either the House or Senate, but not both – is a likely scenario, but in my opinion not the most likely at the time of this writing. Were this to happen, one could expect more government dysfunction and less in terms of accomplishments.

Historically, such political gridlock has been favourable for markets, as major policy changes become more difficult to enact. To pass laws, Republicans and Democrats will actually have to speak to one another and find common ground. More cynical readers might believe that the government rarely does anything good, so having it do nothing is the best possible outcome. Ronald Reagan said in his inaugural address: “In this present crisis, government is not the solution to our problem; government is the problem.” Those words ring as true today as they did 45 years ago.

Under this scenario, captive portfolios should be adjusted. There is likely to be less government spending or further reductions in taxation or deregulation that could potentially lead to faster growth. Inflation would likely slow further. Slower inflation would increase the probability of additional interest rate cuts. Captive portfolios might benefit from an increased allocation to government bonds and agency securities, which are less sensitive to economic cycles. Exposure to companies heavily dependent on government spending should be reduced. As interest rates decline, mortgage-backed securities could be subject to shorter durations due to refinancing activity.

Scenario 3: Democrats sweep the House and Senate

At present, this appears to be the most likely scenario, though it is way too early to change current investment allocations.

A Democratic sweep could result in not only legislative gridlock, but also active opposition to the current administration and its policies. If the magnitude of the sweep is large enough, it could enable massive legislation. If there's a veto-proof majority, the newly empowered Democrats could completely roll the clock back to policies adopted under the Biden administration.

Under this scenario, captive portfolios will need significant readjustment. Stocks and bonds of renewable and green energy companies would likely benefit, while fossil fuel-related industries and energy-intensive companies could face headwinds.

Fixed income markets would likely see a resurgence of inflation similar to what we saw under the last administration, and with it higher interest rates. Significant portfolio adjustments would be in order, with recommendations to shorten duration and wait as the Fed would likely step in, raise rates and cause significant declines in the value of intermediate and longer-duration bonds. Moving to the front of the yield curve could benefit captives with higher money-market rates and the opportunity to redeploy fixed income investments after several rate increases.

‘Keep your powder dry’

Opinions on the election outcome vary widely. But in truth no one knows the result for certain.  As a result, 2026 is likely to be another volatile year. Captive investment portfolios should have enough dry powder and flexibility within their investment policy statement to allow for timely and meaningful adjustments as political uncertainty gives way to clarity post-election.

This article was written by Jack Meskunas a financial adviser with Oppenheimer & Co. Inc. who can be reached at (203)975-2084 or jack.meskunas@opco.com. This article is not, and is under no circumstances, to be construed as an offer to sell or buy any securities. The information set forth herein has been derived from sources believed to be reliable and does not purport to be a complete analysis of market segments discussed. Opinions expressed herein are subject to change without notice and do not necessarily reflect those of the Firm. Additional information is available upon request. Oppenheimer & Co. Inc., nor any of its employees or affiliates, does not provide legal or tax advice.  

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