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Summer vacation has ended early for the U.S. stock market.
The leading equity indexes appeared to hit a wall last last week, and all three opened sharply lower on Monday. As of writing, the Dow Jones Industrial Average (DJIA) is down nearly 1.5%, the S&P 500 is off 1.7% and the Nasdaq Composite is down more than 2%.
Markets are pulling back as the Federal Reserve holds its annual economic policy symposium in Jackson Hole, Wyo. this week. Analysts expect Fed Chair Jerome Powell to discuss how the Fed will proceed in its continuing campaign to douse inflation.
Traders will wait to hear Powell tell them just how aggressive the Fed may be on interest rates in the back half of the year. The summer rally was driven at least in part by enthusiasm that the central bank might ease off its tightening campaign.
Goldman Sachs Warns Markets to Wait and See
Market commentators have explained the two-month rally in the S&P 500 as being driven by investor hopes that peak inflation could turn the Fed away from more hawkish rate hikes.
In a note out on Friday, Goldman warned markets that history hardly supports the recent bout of enthusiasm.
“Performance around bear market rallies and the end of Fed hiking cycles look similar, and ultimately the path of both inflation and growth will determine the market’s trajectory through year-end,” wrote David Kostin, Goldman’s head of U.S. equity strategy.
According to Kostin, there is limited room for more gains—instead, markets should prepare themselves for plenty of risks ahead.
A hawkish Powell speech could further unwind market gains, although one that hints at a pause on rate hikes or simply takes a dovish tone could also impede the progress that’s been made to get inflation to flatten out, if not decline.
Recession Fears Resurfacing
In the background, a possible U.S. recession still looms.
A recent survey by the National Association of Business Economics (NABE) found that 72% of economists polled expect a recession will begin by the middle of 2023, if it hasn’t already started.
One in five (19%) economists polled say the economy is already in a recession.
“Overall, panelists are not confident that the Federal Reserve will be able to bring inflation down to its 2% goal within the next two years without triggering a recession,” said Juhi Dhawan, NABE’s policy survey chair.
The cryptocurrency market has also taken a big leg down over recent days.
On Friday, Bitcoin fell nearly 10% at its worst point, before recovering slightly. BTC tested below $21,000 three times since then, although it appears to be holding above this level on Monday as of writing.
Ethereum has fallen nearly 14% in the past five days. Excitement about Ethereum’s upgrade, known as the “merge,” appears to have faded. But crypto investors should also realize that investors sell off risky assets—like ETH and BTC—when markets drop.