A recent report suggests Trump was calmed by Bessent regarding the potential firing of Fed Chair Powell. However, Trump refuted this, declaring it’s ‘untruthful’.
He emphatically stated that he does not rely on others for market decisions, claiming he knows best what benefits the market. The report alluded to Bessent advising Trump to keep Powell for stability, which Trump has denied.
Trump’s Reaction
Trump reacted strongly to these claims, asserting his independent decision-making. He insisted on his expertise over market dynamics, dismissing any external influence.
Based on this interaction, we believe the market is underpricing the risk of political volatility. The former president’s statement that he explains things to people, rather than the other way around, suggests a low probability of him taking moderating advice. This points to a potential for unpredictable policy announcements should he return to office.
We should prepare for sharp increases in market volatility, especially surrounding Fed policy. During his previous term, the CBOE Volatility Index (VIX) averaged over 15 and saw significant spikes during his trade disputes, a notable increase over the preceding period. His public dismissal of potential advisors signals that this pattern of unpredictability could return.
Uncertain Futures
The open questioning of the Fed’s independence is the most significant takeaway for traders. No president has ever fired a Fed chair over policy disagreements, and the mere suggestion of it creates massive uncertainty. We see this as a clear signal to begin buying protection, such as out-of-the-money put options on major indices like the S&P 500.
The pushback against the report involving Mr. Bessent is particularly telling. It shows a sensitivity to any narrative that portrays him as being managed or calmed by others. This reinforces our view that policy decisions could be sudden and driven by personal conviction over institutional advice.
Therefore, we are looking at strategies that profit from large price swings, regardless of direction. A long straddle on the SPY ETF, which involves buying both a call and a put option, becomes an attractive position to hold heading into the election. With the VIX recently trading at subdued levels, often below 14, options pricing may not yet reflect this potential for future turmoil.
Looking back at the surprise tariff announcements against China from 2018 to 2019 provides a clear historical lesson. Those events caused immediate market drops of 2-3% on multiple occasions, rewarding traders who were positioned for sudden negative shocks. We expect a similar dynamic where pronouncements could trigger sharp, single-day market reactions.
