Stocks are taking a turn again. After what had been a solid run, the S&P 500 broke a four-week winning streak last week and kicked-off this week with more declines.
If you’re wondering if this could be the beginning of a bigger decline, you aren’t alone.
Let’s look at the near-term. Corporate earnings season is wrapping up, the month (and summer) is almost over, and the news cycle will slow. Investors are looking for a catalyst, and without clear direction, volatility is likely to increase.
The internal debate for many investors is shifting from a focus on recession probabilities back to how the Fed will impact markets. Lately the thinking has been that the Fed will “pivot” their interest rate policy. In other words, the Fed will no longer have to raise interest rates to cool inflation and may even be able to cut them as early as next year, which would help boost the economy. Cue the champagne toasts.
That changed last week when several Fed representatives took a tough (or hawkish) stance and indicated there wouldn’t be a change to the trajectory of higher rates, which could weigh on economic prospects. Now everyone is confused.
This isn’t the first time the Fed has confused investors this year. Market expectations for what the Fed will do has a track record of flipping based on economic data (think inflation or jobs data). And leaks of the central bank’s decision days before it’s made official have jolted markets.
As long as the Fed is in the driver’s seat, volatility is likely to remain elevated and the market will remain reactionary to important economic data and decisions by the Fed. September is notoriously a tough month for stocks and it doesn’t seem that will change this year. That said, the months following a mid-term election, have historically been very strong for the market. Weakness in the near-term could potentially be an opportunity for the long-term.
In times like these, keeping a long-term mindset when it comes to investing can help you weather the storm, instead of making a knee-jerk decision.
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Lindsey Bell, Ally’s chief markets & money strategist, is an award-winning investment professional with a passion for personal finance and more than 17 years of Wall Street experience. Bell’s unique ability to connect the dots between data and real life and craft bite-sized money ideas that people can use and apply stems from her deep background as an analyst, researcher and portfolio manager at organizations including J.P. Morgan and Deutsche Bank. She is known for demonstrating why and how an understanding of all things money improves a person’s finances and overall well-being. An ongoing CNBC contributor, Bell empowers consumers and investors across all walks of life and frequently shares her insights with the Wall Street Journal, Barron’s, Kiplinger’s, Forbes and Business Insider. She also serves on the board of Better Investing, a non-profit focused on investment education.