In the months leading up to the presidential election, and now almost one year into President Trump’s term, there has been a great deal of ongoing speculation about how this President and Congress might influence the financial markets. In particular, and top of mind for many market participants, is the degree to which potential tax reform may have already impacted the year-to-date stock market rally. In our view, there is inevitably some tax-reform hopefulness being reflected in current valuations. However, more importantly, strong corporate profits, steady economic growth and “dovish” Federal Reserve policy are likely more responsible for recent good results. This combination of concrete and positive conditions has surely allowed the capital markets to tolerate, if not outright ignore, the messy back and forth of politics in our nation’s capital.

Quantifying the stock market’s expectations regarding potential pro-growth policies is always a difficult task. By most measures, the economy is already doing quite well and doesn’t need any additional stimulus to continue moving forward. Furthermore, corporate earnings continue to exceed expectations this year by a rather wide margin, and this trend is happening globally. Indeed, many of the domestic market’s initial knee-jerk reactions, both positive and negative, to the election outcome last year have since largely unwound, which suggests that hope for tax reform and other potentially transformative policies have also tempered.

In our view, a Goldilocks backdrop of steady economic growth, low unemployment, strong corporate profits and historically low interest rates have collectively been the primary drivers of stock market returns this year. In addition, this is also the first time since 2010 that the global economy has experienced synchronized growth. All 45 countries tracked by the Organization for Economic Cooperation and Development (OECD) are on track to grow this year, and 33 of them are poised to accelerate from a year ago. And, despite being in the eighth year of this economic recovery, a slowdown does not seem imminent. Moreover, a continuation of this positive trend is not dependent upon any kind of meaningful tax reform being enacted by Congress.

Instead, the task of keeping the U.S. economy on a stable growth trajectory depends mainly on the actions of the Federal Reserve, not the U.S. President or Congress. And yet, while the Federal Reserve operates independently of the White House, there is an inherently significant and influential connection between the two. The Chair of the Federal Reserve, a role that is widely considered the second-most powerful political position in the world, is chosen by the President. Furthermore, members of the Fed Board of Governors are also appointed by the President, and they play a major role in setting U.S. monetary policy.

The current Federal Reserve Chair, Janet Yellen, will see her current four-year term end in February of 2018. Coincidentally, there will also be four additional vacancies on the Fed’s seven-member monetary policy committee by that same time. As a result, the biggest impact that President Trump is likely to have on the economy and financial markets will probably not come from any ongoing policy drama in Washington, but instead will be driven by his recent choice for Chair Yellen’s successor as well as the four vacant seats on the committee.

Recent presidents have all re-nominated the sitting Fed Chair during their first terms in office. Even so, it wasn’t surprising that President Trump chose to nominate someone other than Janet Yellen. His choice of Jerome Powell as the next Fed Chair has been described by many as a “safe choice”. Powell was first appointed as a Fed Governor in 2012 by then President Obama and, since that time, he has voted for every Fed policy decision, and has also backed the more recent plan to unwind the Fed’s balance sheet. Indeed, this has prompted many to label him as a Republican version of Yellen, which categorizes him as being in the “dovish” camp. However, President Trump considered other candidates for Fed Chair who ranged from dovish to quite hawkish, and thus some of the other vacancies could still be filled by people who meaningfully differ in their overall interest rate outlooks.

Still, most presidents want their time in office, and hence their legacy, to include a period of robust economic growth. In the case of President Trump, who aspires to achieve sustained 3% GDP growth, the recent nomination of Powell seems logical, since a more hawkish new Fed Chair would surely burden that ambition. So far, the initial market reaction to Powell’s nomination has been positive as market participants essentially breathe a collective sigh of relief that the course of monetary policy will likely be relatively unchanged. Of course, the longer-term impact of this decision is harder to determine at this point and will depend on Powell’s evolving views, plus that of the rest of the committee, regarding the “correct” pace of rate hikes and balance sheet adjustments.

Federal Reserve appointments aside, it’s hard to ignore the possibility that some sort of potential Washington scandal or other significant political drama might occur in the current political climate, and if so, whether this would have a lasting impact on financial markets. However, looking at the pattern of historical events, from the assassination of President Kennedy to Nixon’s Watergate hearings, to Clinton’s impeachment process, and many others, it appears as though the typical outcome of such events is usually short-term market volatility followed by recovery, unless the economy’s direction, or the government’s stability, is severely compromised. On the other hand, if the economy and corporate earnings are healthy, this can help smooth out a lot of bumps in the road. We believe that this latter scenario is poised to continue.

Make no mistake, we are in an era where discussing politics can quickly elicit very strong emotional responses, and Washington seems to be providing constant fuel for this fire. Historically speaking though, the financial markets have provided a welcome refuge from the ever-present political noise by quickly focusing on fundamentals and the true economic and earnings impact of the moment. We see history continuing to repeat itself in this regard and plan to take advantage of politically driven market volatility, as long as the economic and corporate earnings outlook remains strong.