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Summer is coming to an end. And, alas, the same may be said for stocks' recent rally.
Stock market investors finally got some relief over the last few months after a rough start to the year. The S&P 500 fell into a bear market in June but then rose around 17% by mid-August. Investors hoped that better-than-expected July inflation numbers supported the idea that the high prices of goods and services we've seen across the country had peaked, and the Federal Reserve would be able to slow its interest rate hikes as a result.
But on Friday, Fed Chair Jerome Powell indicated that the central bank had no plans to hit pause on rate hikes, which it uses to attempt to curb inflation.
"Restoring price stability will likely require maintaining a restrictive policy stance for some time," Powell said in a speech at the Fed's annual meeting in Jackson Hole, Wyoming. "While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses."
Here's what to expect from stocks in coming months.
Will the summer stock market rally continue?
The Fed chairman did not give the markets the news they wanted to hear Friday, says Eric Diton, president and managing director at The Wealth Alliance, a wealth management firm.
"Powell made it very clear that the Fed’s number one goal is to bring down inflation, despite the pain it may bring to the economy," Diton adds.
Markets pulled back sharply on the news, with the S&P 500 finishing Friday's trading day down 3.4%. Raising interest rates is a tool the central bank uses to try to cool economic activity when inflation is soaring, as higher interest rates make it more expensive for consumers and businesses to borrow and spend money. But the rate hikes can also crimp prices for financial assets, like stocks.
Going forward, investors don't seem optimistic that the stock market rally they've seen in recent weeks will continue. Net short positions against S&P 500 futures have reached levels that we haven't seen in two years indicating traders are upping their bets that the index will fall — or at least hedging against the risk that it will, the Wall Street Journal reported Sunday.
"We believe the market's summer rally was ephemeral," Rod von Lipsey, managing director with UBS Private Wealth Management, wrote in an email to press. Strategists at UBS Wealth Management wrote in a note Monday that with rates likely to stay higher for longer, they expect further volatility.
The firm certainly isn't the only one that sees a rollercoaster-like market in our future.
"We expect more volatility as we enter fall and winter, as we suspect earnings expectations will start weakening more severely, offset by inflation headlines/central bank hawkishness weakening as well," strategists at Raymond James wrote in a research note Sunday.
And Nationwide’s chief of investment research, Mark Hackett, said in market commentary shared Friday that "volatility will continue until clarity is gained on the ultimate path of Fed policy and its ability to navigate a soft landing."
But just because the rally may not continue smoothly doesn't mean prices will necessarily get as low as they did in June. Sam Stovall, chief investment strategist at CFRA, wrote in a research note Monday that his firm doesn't foresee "a lower low" for the S&P 500 than what we experienced June 16.
While the market's future is uncertain, financial advisors recommend maintaining a long-term approach to investing and assembling a well-diversified portfolio that will help you weather whatever storm may be ahead.