U.S. stocks stumbled to start the week, with the Dow Jones Industrial Average slipping 161 points, or 0.3%, the S&P 500 easing 0.2%, and the Nasdaq Composite down 0.1%. The pullback came just days after the Dow and S&P 500 closed at record levels, underscoring how fragile investor sentiment remains in the face of political uncertainty and monetary policy shifts.

Political Uncertainty and Shutdown Fears

Markets turned cautious as the threat of a U.S. government shutdown gained traction. The Senate rejected both Republican and Democratic proposals to temporarily fund the government, heightening tensions ahead of the September 30 deadline. Senate Majority Leader Chuck Schumer called on President Donald Trump to work with Democrats on a resolution, but the impasse continues to weigh on investor confidence.

Historically, markets have reacted with volatility during shutdown standoffs. While the direct economic impact of short shutdowns has often been modest, prolonged budget gridlock undermines business and consumer confidence. For investors, the standoff adds another layer of risk at a time when equities are already trading at record levels and priced for optimism.

Fed Policy and Investor Positioning

The current backdrop is further complicated by the Federal Reserve’s latest rate decision. Last week, the central bank delivered a widely expected quarter-point cut, its first since December, as policymakers signaled caution over labor market softness. The move initially rattled markets but was ultimately interpreted as a dovish tilt that could extend the cycle of monetary support.

Markets are now pricing in two additional cuts before year-end, according to the CME FedWatch Tool. Such expectations have buoyed risk appetite in recent weeks, but analysts caution that the Fed may be less aggressive than futures markets anticipate. Emmanuel Cau, head of European equity strategy at Barclays, noted that with equities near highs, further upside will depend less on rate cuts and more on resilient economic data.

Inflation Data in Focus

The coming week will test market assumptions with the release of the personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge. Economists expect the data to confirm that inflationary pressures remain elevated but manageable, a scenario that would allow the central bank to sustain its current policy stance.

If inflation surprises to the upside, however, it could limit the Fed’s flexibility and undermine equity valuations that are reliant on continued policy easing. Conversely, weaker inflation data would likely reinforce investor confidence that additional cuts are forthcoming, supporting both equities and credit markets.

Looking Ahead

The retreat in U.S. equities at the week’s open highlights the delicate balance between optimism and risk. Investors must weigh record market valuations against political uncertainty in Washington, evolving inflation dynamics, and the Federal Reserve’s cautious signaling. For now, sentiment remains underpinned by expectations of further monetary easing, but incoming economic data and the resolution of fiscal negotiations will be pivotal in determining whether the rally can sustain its momentum.