Court Deals Trump a Setback Ahead of Fed Meeting

Early on Tuesday morning, based on U.S. equity futures, it looks like the market will grind its way higher today, but we will want to re-check expectations following the morning’s August Retail Sales report and August Industrial Production reports.

Should the market continue on its upward trajectory, odds are that we will see the S&P 500 join the Nasdaq Composite in overbought territory based on their respective RSI levels. With Monday night’s close, the RSI reading for the S&P 500 stood at 69.71, and for newer folks, once that indicator crosses 70.0, we are technically in overbought territory.

As we discussed on Monday, we are closely watching shares of Morgan Stanley MS and Alphabet GOOGL, given their overbought status and their position sizes in the Portfolio. Should the market move higher on Tuesday morning, we may elect to dial back the Portfolio’s exposure closer to 4.0% positions. Our reasoning for this is the potential for Wednesday's Fed meeting to be a “buy the rumor, sell the news” event.

As the Fed begins its two-day meeting, Federal Reserve Governor Lisa Cook may be in attendance. On Monday night, the U.S. Court of Appeals for the District of Columbia Circuit ruled that President Trump cannot fire Cook as “the stringent requirements for a stay pending appeal” were not met. The court didn’t address the underlying claims of mortgage fraud against Cook and also did not reference reports over the weekend that loan documents for Cook’s Georgia home appear to contradict the claim put forth by Federal Housing Finance Agency Director Bill Pulte. What the court did find was the government “failed to provide Cook even minimal process — that is, notice of the allegation against her and a meaningful opportunity to respond — before she was purportedly removed…”

Now to see if Trump asks the Supreme Court to step in. Let’s remember that the Federal Open Market Committee is a 12-person group, and it will take a majority to decide policy. While Cook was one of the FOMC members to vote in favor of leaving existing monetary policy intact, eight others did the same – only Vice Chair Michelle W. Bowman and Governor Christopher J. Waller voted for a rate cut. Adriana Kugler stepped down on August 8 and will be replaced by Trump's pick, Stephen Miran, starting with Tuesday's policy meeting.

Ahead of the economic data we’ll get on Tuesday and Wednesday morning, the odds of a 25-basis-point rate cut remain high, but we continue to think the number of telegraphed rate cuts to come through the end of 2026 is likely to be less than 150 basis points expected by the market.

When we get the Fed’s policy decision on Wednesday, we will be very interested in the vote count and what it could mean as we digest upcoming jobs and inflation data.

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At the time of publication, TheStreet Pro Portfolio was long MS and GOOGL.