The summer lull is officially over! Tariff and Federal Reserve concerns reignite, Wall Street braces for a volatile September

After the end of Wall Street’s summer lull was marked by the market reopening following the Labor Day holiday on Tuesday, investors are bracing for more volatility.

Since September has historically been the worst-performing month for the U.S. stock market, both equities and bonds have been hit as concerns over the Federal Reserve’s independence and the uncertainty of President Trump’s tariffs come into focus.

For a long time, market participants have been worried about the bubble-like valuations of stocks and corporate bonds, not to mention the mounting signs of a U.S. economic slowdown this summer.

Meanwhile, the escalating war of words between Trump and the Federal Reserve has sparked concerns that political interference could shake the U.S. bond market, even though markets seemed to have taken this in stride in recent weeks.

On Tuesday, those long-simmering anxieties finally erupted, reignited by new doubts over the legality of Trump’s tariffs that surfaced over the holiday weekend. This led to a simultaneous drop in both stocks and bonds, and many in the market expect more turbulence ahead of Friday’s key jobs report.

Seth Hickle, portfolio manager at Mindset Wealth Management, said, “We have some uncertainty around these tariff issues, and I think that’s the trigger for the current risk-off sentiment. The concern is that the ‘bond vigilantes’ will awaken and cause some chaos in the bond market, as we may have to return some of the tariff revenue overseas,” he said.

Bond vigilantes refer to bond investors who punish poor government policies by selling off government bonds.

The Chicago Board Options Exchange (CBOE) Volatility Index hit its highest level in more than four weeks, while the S&P 500 fell 0.7% on Tuesday. In a global bond sell-off, long-term U.S. Treasury yields soared.

The benchmark 10-year U.S. Treasury yield (which rises as bond prices fall) surged nearly 5 basis points to 4.269%, while the 30-year Treasury yield jumped to its highest level since mid-July.

Rising Treasury yields can hurt the stock market, as bond returns become more attractive. Investors typically view the 10-year Treasury yield around 4.5% as the level at which demand for stocks wavers.

Additionally, rising Treasury yields also tend to support the dollar, which rebounded on Tuesday from recent weakness.

Mark Luschini, chief investment strategist at Janney Montgomery Scott, said that the 30-year Treasury yield surging to nearly 5% “is putting some pressure on the market.”

Luschini said that the court’s ruling on Trump’s tariffs “clearly brings some shock in terms of what it means for the collection of tariff revenue and helping to reduce our budget deficit.”

September’s Chill

Seasonal weakness may partly stem from investors returning from summer vacation and rebalancing portfolios, while also making tax and other adjustments before year-end.

According to the Stock Trader’s Almanac, over the past 35 years, September has been the worst-performing month of the year for the S&P 500, with an average decline of 0.8%. According to the Almanac, in 18 out of those 35 Septembers, the index fell—making it the only month in that period with more declines than gains.

Christian Hoffmann, head of fixed income and portfolio manager at Thornburg Investment Management, said that the risk-off move this month was largely expected, and Tuesday’s heavy debt issuance in the credit market exacerbated the sell-off in government debt as investors reallocated funds to corporate bonds.

“Our tendency all summer has been to reduce risk as valuations have become increasingly stretched,” he said.

According to the ICE BofA Corporate Bond Index, corporate bond spreads—the premium high-grade companies must pay to borrow above U.S. Treasury yields—reached a historic low of 75 basis points last month.

Hoffmann said, “Given the low volatility and spread levels we’ve been seeing, more volatility seems like the more likely scenario.”

Friday’s August nonfarm payrolls data will be crucial for investors assessing how aggressively the Federal Reserve will cut rates in the coming months, although persistent inflationary pressures may limit the pace of rate cuts.

Investors will also be watching the confirmation hearing for Stephen Milan this week. His appointment comes as Trump escalates his attacks on the Federal Reserve, including relentless criticism of Chairman Powell for not lowering rates and efforts to remove Governor Cook.

“The market sees the possibility of a central bank with weakened independence, so there will be an impact,” said Josh Chastant, public markets portfolio manager at GuideStone Funds.

Investors are also looking for alternative assets to help protect portfolios in turbulent markets. Gold prices rose on Tuesday to near a record high of $3,540 per ounce.

Aakash Doshi, head of gold strategy at State Street Global Advisors, said, “This year, both gold and bitcoin have risen—it’s not one up and the other down.”

He noted that both assets—one historically seen as a hedge, the other as a high-volatility strategy—are converging on the dollar issue. “Both offer alternatives to fiat currency and de-dollarization.”