Wall Street can't get a handle on Kevin Warsh. Expect a volatile market until it does.

By Hardika Singh

It's going to be a bumpy ride for investors. These stock-market sectors could provide a refuge.

Kevin Warsh's nomination serves as another test of the Fed's independence.

If the stock market's reaction to Kevin Warsh is any guide, it's going to be a bumpy ride for investors over the next few months.

Warsh is President Donald Trump's choice to succeed Jerome Powell as chair of the Federal Reserve after Powell's term ends in May. Warsh commands a reputation as an inflation hawk and a hater of quantitative easing, so his nomination serves as another test of the Fed's independence.

In typical circumstances, opinions Warsh has held for decades, widely documented in various articles written by him, would push bond investors to send U.S. government bonds yields soaring. That of course would be the complete opposite of what the president wants - which is lower interest rates that decrease borrowing costs for households and businesses.

Given that the president has said that anyone who disagrees with him on rate trajectory will never be Fed chair, the reaction of investors shows they aren't yet sure if Warsh will stick to his guns in defiance of the president's affordability agenda.

As a result, volatility could reign over the next few months.

Highflying and frothy stocks would be among the ones most vulnerable to unraveling until investors find their footing. For example, about 40% of the small-cap companies in the Russell 2000 RUT are unprofitable, yet the index is outperforming the S&P Small Cap 600 SML, which is composed of mostly profitable companies.

Some investors might seek safety in the comfort of defensive market sectors including consumer staples, utilities and healthcare. The bet there is that no matter what happens to the economy, consumers will always buy necessities, pay electric bills and need healthcare.

Tech-stock stalwarts also might benefit as investors lean into artificial intelligence and its promise to drive the broader stock market's returns. That would be particularly true if Warsh holds to his view that investment in AI will be a driver of economic productivity gains.

The best move for investors during this time will be the hardest: Do nothing and stay focused on the long term.

Rates and brakes

Warsh's nomination suggests that Powell will likely stay on the Fed board until the end of his term as a governor in 2028, ensuring that any major overhaul of the Fed's goals gets voted down by the "old guard" governors.

Read: Warsh pick doesn't end talk that Powell could stay on to defend the Fed's independence

Some investors believe that Trump picked Warsh because he'll be able to sway other Fed officials to support the president's case for lower rates. Others believe that Warsh could turn on the president - something that evidently concerns Trump, who remarked at the World Economic Forum in Davos, Switzerland, earlier this month, "It's amazing how people change once they have the job."

In either scenario, concerns about Fed independence are sure to come into focus. Trump joked on Saturday that he would sue Warsh if he didn't lower interest rates, according to a Wall Street Journal report. His comment follows a series of attempts by the Trump administration to interfere with the independence of the central bank. The Justice Department has opened a criminal investigation into Powell. The president has also tried to fire Fed governor Lisa Cook. The Supreme Court will decide that matter.

It will take time for investors to get acquainted with the new Fed chair, and they need to remember that he would command just one vote on rate decisions. Power and influence have their limits. Still, investors had best hold on tight until the markets have digested Warsh's stance.

Hardika Singh is an economic strategist at Fundstrat Global Advisors, an investment research firm. Read her disclosures here.

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Also read: Kevin Warsh isn't who investors think he is - how you can profit from their mistake

-Hardika Singh

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02-02-26 1512ET