Historically speaking, equity markets loathe uncertainty – especially after an extended bullish price move. As Wall Street’s largest institutional investors start to return from their summer vacations, five important questions loom.
Most investors see the US Federal Reserve’s independence as a cornerstone of its monetary policy decisions. Through long and staggered service terms and complete operational independence, the body is supposed to be shielded from political forces. While both sides of the aisle claim the other side is seeking to control the Fed, both parties are guilty. For instance, in 2024, Democrat Senator Elizabeth Warren wrote a letter to Fed Chair Powell saying that the “Fed must cut by 75bps on September 18th.” Just one year later, Warren said, “What you are doing (by pushing for lower rates) will take an axe to Fed Independence.” Meanwhile, the Republicans are just as guilty. President Trump and his economic team have been pushing Fed Chair Powell to cut rates for months.
As if the typical political double-speak was not enough confusion for markets, the picture got even murkier when President Trump fired Fed Governor Lisa Cook. President Trump fired Cook based on allegations of mortgage fraud from Federal Housing Finance Agency head Bill Pulte. The Federal Reserve Act allows a president to fire a Fed Governor for cause, but this is the first time a president has done so. Cook has vowed to fight the firing. Regardless of the outcome, the overhang over the US Central Bank will likely weigh on markets until there is a resolution.
In April, President Trump’s ‘Liberation Day’ tariffs led to the first bear market since 2022. Though the tariffs were far higher than investors anticipated, Trump merely used a “Shock and bore” approach to negotiate better trade deals with major trading partners such as the EU. After a few weeks of sliding markets, investors caught onto Trump’s strategy and stocks rallied strongly in one of the fastest rebounds in history, eventually printing all-time highs. However, as soon as the market seemed to have adjusted to the Trump tariffs, President Trump suffered a huge setback with many of his administration’s tariffs being ruled illegal by a federal appeals court late last week. The Trump administration will likely appeal the ruling, and the tariff dispute should reach the Supreme Court. Regardless of which way the verdict goes, the fact that such a significant market force is in limbo will likely cause skittishness among investors.
