The market is selling off Thursday ahead of Powell’s keynote speech tomorrow morning at 10am EST at Jackson Hole. The odds of a 25 basis point cut on September 17 have decreased from 92% a week ago to 73.5% today. In other words, more and more September 17 is looking like a live meeting and a hawkish Powell could confirm that tomorrow.

Let’s start with the drama. President Trump has been at Powell’s throat about cutting rates since he entered office. The Fed is supposed to be independent of the President but Trump has no respect for such boundaries.

But there are good reasons for such independence. An independent Fed means that the central bank can do what’s right for the economy, balancing employment and inflation, without being subject to elected officials with a short term time horizon. Trump wants rates down to stimulate the economy in order to keep his approval ratings high and for Republicans to win elections. Whatever happens after he’s gone is of no concern to him.

But Powell has to consider that lowering rates while inflation is still above the Fed’s target may exacerbate it leading to a big problem for the economy. While Trump says “There is no inflation” those of us who live in the real world know that inflation is running a lot higher than the 3% reported by the BLS.

I think Warren Pies has it right when he says that Powell will be strictly “data dependent” which makes the decision a coin flip. Powell is a respectable and competent Fed Chair and I can’t see him being swayed one way or the other by Trump’s tirades.

The data makes September 17 a tough call. The jobs market is weakening while inflation refuses to roll over. Further, tariffs are inflationary and we have not seen their full impact on prices. The prudent course of action seems to stand pat for the moment and see how things play out.

If Powell starts to shift the calculus in this direction tomorrow as I suspect he will, the market will not like it. The market likes easy money because it juices the market in the short term regardless of long term consequences. And that is why I think we are seeing weakness in stocks ahead of tomorrow’s speech.

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Walmart (WMT) reported 2QFY26 earnings this morning. The numbers were excellent, as expected, with Walmart US Comps excluding fuel +4.6%. WMT raised full year FY26 EPS guidance from $2.50-$2.60 to $2.52-$2.62. But the stock is off nearly 5% as it came into the report with a P/E ~40x. It’s just another reminder that the market – and especially the mega caps – are quite expensive.

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Based on these considerations I took a decent short position in the Top 20 ETF (TOPT) yesterday morning at $28.47. The largest stocks are making up more and more of the total value of the S&P and that is where the overvaluation is concentrated. In addition, my long portfolio contains mostly smaller names and owns only a few of the mega caps in this ETF (Amazon, Google, Procter & Gamble and a small position in Eli Lilly).

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