The Rising Unemployment Rate and Its Implications for Trump's Midterm Prospects and Market Volatility

The U.S. economy is navigating a complex interplay of rising unemployment, waning consumer confidence, and political fragility, all of which are reshaping investment strategies and electoral dynamics. As of Q3 2025, the unemployment rate climbed to 4.4%, with the broader U-6 rate reaching 8.1% in September, signaling a cooling labor market despite historically low unemployment levels. This economic softening, coupled with a sharp decline in consumer confidence to 88.7 in November-a 7-point drop from October-has intensified scrutiny of President Donald Trump's economic stewardship and raised alarms about the 2026 midterm elections. For investors, these developments underscore a critical shift in capital flows toward safe-haven assets and resilient sectors, while underperforming industries face mounting headwinds.

The Political-Economic Nexus: Trump's Midterm Vulnerability

The labor market's slowdown has directly impacted voter sentiment, particularly among those prioritizing affordability. A recent AP-NORC poll revealed that 46% of Americans blame Trump for the affordability crisis in housing, groceries, and healthcare, with his economic approval rating plummeting to 31%-the lowest of his presidency. This erosion of trust is compounded by a Gallup poll showing Trump's overall approval at 36%, with poor marks on inflation, healthcare, and fiscal management.

The political ramifications are stark. In key House districts, voters who cite the economy as their top concern favor Democrats over Republicans by a 12-point margin in generic ballot tests. A Marist Poll further highlights a 14-point Democratic lead in congressional ballot preferences, suggesting a potential wipeout for Republicans in 2026. Internal GOP anxiety is palpable, with figures like Senator Josh Hawley openly criticizing the party's disjointed messaging on affordability and former Governor John Kasich warning of a "very tough" electoral landscape. These dynamics reflect a broader disconnect between Trump's economic agenda-centered on tariffs and tax cuts-and the immediate concerns of cost-conscious voters.

Market Volatility and Capital Flight to Safe Havens

While the VIX index settled at 16 in Q3 2025-historically low-investors are increasingly reallocating capital to assets perceived as immune to macroeconomic shocks. Gold, for instance, surged past $4,000 per ounce, defying its traditional inverse relationship with U.S. Treasury yields, which stabilized near 4.1%. This divergence underscores a structural shift: investors are no longer viewing Treasuries as the sole safe-haven asset. Instead, gold's appeal has grown amid waning confidence in the U.S. dollar and rising fiscal uncertainty, including record federal deficits and debt issuance.

The Federal Reserve's September rate cut to 4–4.25% further amplified this trend, as policymakers sought to mitigate labor market risks while navigating inflation expectations that remain "well-anchored". However, the central bank's accommodative stance has not quelled concerns about a potential recession, with the Expectations Index hovering below 80-a threshold often associated with economic pessimism.

Resilient Sectors and Strategic Positioning

Amid this uncertainty, certain sectors have demonstrated unexpected resilience. The home furnishings and e-commerce industries, for example, saw sales rise by 2.3% and 1.8%, respectively, in October 2025, as consumers prioritize essential and convenience-driven purchases. Department stores, long considered a dying retail segment, also bucked trends with a 4.9% sales increase, suggesting a niche revival for well-positioned chains.

Conversely, sectors like automotive and electronics face challenges. Automotive sales declined by 1.6% in October, partly due to the expiration of EV subsidies, while electronics grapple with tepid demand amid budget constraints. These divergent performances highlight the importance of sector-specific strategies for investors.

Defense-related industries, meanwhile, have emerged as a strategic allocation. With the U.S. and European defense budgets expanding in response to geopolitical tensions, advanced military technologies and infrastructure spending are attracting capital. The proposed 2026 U.S. defense budget, emphasizing next-generation systems and nuclear modernization, further solidifies this trend. Investors are also favoring international developed markets, which benefit from a weaker dollar and attractive valuations.

Underperforming Sectors and Systemic Risks

The automotive and electronics sectors exemplify the vulnerabilities of industries reliant on discretionary spending. The automotive sector's struggles are compounded by policy shifts, such as the expiration of EV incentives, while electronics face a dual challenge of inflation and reduced consumer appetite for non-essential goods. These sectors' underperformance underscores the risks of overexposure to cyclical industries during periods of economic fragility.

Conclusion: Strategic Implications for Investors

The confluence of rising unemployment, political instability, and shifting consumer behavior demands a recalibration of investment strategies. Safe-haven assets like gold and U.S. Treasuries remain critical, but their roles are evolving. Similarly, defense sectors and resilient retail categories offer defensive positioning against macroeconomic volatility. For investors, the key lies in diversification across asset classes, geographies, and sectors-prioritizing adaptability in an environment where economic and political uncertainties are inextricably linked.

As the 2026 midterms loom, the interplay between Trump's waning economic credibility and market dynamics will likely intensify. Those who anticipate these shifts and align their portfolios with resilient, strategically positioned assets will be best poised to navigate the turbulence ahead.