By Lewis Krauskopf and Saqib Iqbal Ahmed
NEW YORK (Reuters) - Battered U.S. stocks are facing a potentially painful stretch in the weeks ahead, as hawkish Federal Reserve policy, rising bond yields, geopolitical uncertainty and the corporate earnings season fuel investor unease.
After last week’s sharp decline, the S&P is down 5.7% so far in April and is on track for its worst monthly drop since March 2020, when the spreading COVID-19 pandemic blasted stocks.
One measure of investor anxiety, the Cboe Volatility Index, known as Wall Street’s fear gauge, on Friday notched its largest one-day gain in about five months to close at a five-week high of 28.21.
“More variables in any equation create greater uncertainty in terms of the outcome,” said Michael Farr, president of Farr, Miller & Washington. “We have more variables now than I can remember in my career.”
Chief among market participants' worries is a Fed that has repeatedly ratcheted up its hawkish rhetoric as it gears up to fight the worst U.S. inflation in nearly 40 years.
The hawkish stance was underlined on Thursday, when Fed Chair Jerome Powell said a half-point interest rate increase "will be on the table" at the central bank’s monetary policy meeting next month.
Traders in eurodollar futures, which reflect the U.S. interest rate outlook for the next few years, on Friday priced in the Federal Reserve's rate-hike cycle peaking at a higher level than previously expected, adding to worries that the scope of Fed tightening could hit U.S. growth.
“The stock market is coming to grips with the reality that the Fed is serious about raising rates this time," said David Carter, managing director at Wealthspire Advisors. "It now expects large and quick increases and is having a difficult time digesting that.”
Rising Treasury yields have added to pressure on stocks and other risky assets. Real yields – which account for projected inflation – climbed into positive territory last week for the first time since March 2020, dulling the allure of equities in comparison to risk-free U.S. government bonds.
Plenty of investors believe the economy – and markets – can remain resilient. Solita Marcelli, chief investment officer, Americas, at UBS Global Wealth Management, said the U.S. economy is robust enough to grow even if Fed hikes match current expectations.
“We believe equity markets will continue to be range-bound until the market is convinced that a Fed-induced recession is not imminent,” she wrote in a Friday report.
Still, the ride may be a nerve-wracking one, especially as investors turn their focus to earnings season, which kicks into high gear this week with reports from megacap growth companies Apple, Microsoft, Amazon.com and Google parent Alphabet.