With the midterm elections drawing closer, some hedge funds are positioning for a possible Democratic sweep by shorting companies they believe have developed close ties to the Trump administration, On The Money has learned.
Short sellers aim to profit when a stock falls. They borrow shares, sell them at the current market price and, if the value declines, buy the shares back more cheaply to return to the lender—keeping the difference as profit.
Known on Wall Street simply as “shorts,” these investors also play a critical role in the market by challenging lofty valuations when optimism has pushed stock prices sharply higher.
The latest short-selling strategy is built around the possibility that an emboldened progressive wing of the Democratic Party could use control of Congress to scrutinize or punish businesses seen as aligned with its chief political target: the Trump White House, according to Larry McDonald, founder of the Bear Traps Report.
The closely followed research service for short sellers has been tracking discussions about companies that investors believe could face pressure if Republicans lose the House—and potentially the Senate—in the upcoming elections.
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The theory is that Democratic lawmakers leading investigative committees in both chambers could put companies with strong Trump administration connections under intense political and regulatory scrutiny.
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For clarity, On The Money does not support this form of political retaliation. In our view, such tactics are corrosive and ultimately harmful to effective government.
We were critical of efforts by politicians to pursue the Trump family over what we viewed as uncertain allegations of bank fraud, including the case brought by New York Attorney General Tish James. We were similarly unconvinced by the Trump administration’s search for grounds to pursue a bank-fraud case against Democratic Federal Reserve Governor Lisa Cook over the listing of two properties as primary residences. A straightforward application error, in our view, could explain the discrepancy.
Still, Wall Street remains relentlessly focused on profit rather than party affiliation, and McDonald says short sellers are already positioning accordingly. Broadly speaking, he says they are looking at companies that made sizable contributions to the controversial renovation of a new White House ballroom.
Technology companies represented at this week’s White House summit on the future of AI regulation are another area of interest, particularly those whose chief executives are viewed as especially close to Trump. Cryptocurrency is also drawing attention amid the Trump family’s growing involvement in digital assets and the administration’s push to reduce regulation across the sector.
“Socialists could win 20 seats in the House based on the polling,” McDonald said. “The shorts believe markets have not accounted for what that might mean. The impact would extend beyond Democrats blocking Trump’s broader economic program.”
Put simply, the recent gains in the Dow Jones Industrial Average, S&P 500 and Nasdaq could face a roadblock if Congress shifts toward lawmakers fundamentally opposed to Trump’s economic agenda. It may be an uncomfortable reality, but markets are not always driven by financial data alone—politics can matter just as much.
