As I write this, we have major US indices down about 2%. Many of us expected some volatility surrounding today’s Federal Reserve conference in Jackson Hole, Wyoming, but I doubt that many foresaw such a violent swing.

Sadly, much of today’s selloff was self-inflicted. We opened lower after China announced a series of retaliatory tariffs. That announcement was unexpected – at least its timing was – but the markets’ reaction was as would be expected. Then the markets shifted their focus to Chairman Powell’s address to the conference a half-hour after US equity markets opened. 

Preliminary interviews with various leaders of regional Fed banks offered a range of opinions, some implying that aggressive action was necessary while others wanted to wait until the solid economic data abated.Mr. Powell’s address appeared to take the middle ground, leading the markets to imply that a rate cut of 25 basis points at the September meeting was highly likely. Markets began to rally as rate clarity began to emerge.

Then, the tweetstorm started. During his comments, Mr. Powell pointed out that while rate cuts can indeed be helpful to some sectors of the economy, he could do nothing about trade uncertainty. That appeared to be the trigger for a series of presidential tweets, among them “…My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” and ”[…]American companies are hereby ordered to immediately start looking for an alternative to China[…]”.He also announced that retaliatory tariff measures would be coming later today. 

I will put this plainly. An escalating trade war is terrible for equities, and the threat of further measures that may not be revealed before the close makes traders very nervous. Also, there seem to be greater worries about interference with the Federal Reserve. Markets had somehow either shrugged off or become somewhat inured to the President’s attacks on the Fed chair and the institution’s independence. Today they reacted. It seems a bridge too far to compare the Fed chair to the head of a nation with whom we are actively engaged in a trade war. Also, the US President has no authority to unilaterally order companies to avoid doing business in a particular country.  At best this is misguided, at worst irrational. Neither cause is market-friendly. 

My concern for investors is that we have more definitively entered a period of market skittishness. If that is correct, there will be trading opportunities as markets overshoot in various directions. The problem is that the overshooting could overwhelm aggressive traders. A period of market volatility punctuated by geopolitical worries is a time for most investors to maintain a cautious footing.