Lewis Krauskopf and Saqib Ilqbal Ahmed

NEW YORK (Reuters] – The hawkish Federal Reserve policy and rising bond yields will fuel investor concern.

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.”

The Fed has been a major concern for market participants. It is gearing up to face the most severe U.S. inflation crisis since almost 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.

The eurodollar futures market, which reflects the U.S. rate outlook for the next several years, was priced Friday in a Fed rate-hike cycle peaking higher than originally expected. It raises concern that Fed tightening may have an impact on U.S. GDP 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.”

The rising Treasury yields are putting 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 is chief investment officer Americas at UBS Global Wealth Management. She said that the U.S. economic system was strong enough to continue growing, even though Fed increases are not in line with 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.

The ride can be nerve-wracking, even though it is a thrilling one. Investors now turn their attention to earnings season which kicks off this week with reports by megacap growth companies Apple, Microsoft, Amazon.com, and Google parent Alphabet.

Although quarterly results so far have been mostly on the right track, investors are quick to penalize companies that report bad news. Netflix (NASDAQ:) was the latest victim. Shares fell by 35% within a single trading session after Netflix reported its first loss in subscriber in 10 years.

“Next week is the most important week of the first-quarter earnings season, and there is not a lot of confidence about results given what happened to a few big companies this week, Netflix being the most obvious example,” said Peter Tuz, president of Chase Investment Counsel.

Options markets have seen a rise in worries due to mounting concerns. On Friday, the volatility futures curve, which shows how stock market traders view future months’ gyrations in future months, flattened. This indicated that investors are becoming more worried about an imminent shock to stocks.

“The futures curve went from normally sloped to flat as a pancake within a few hours (Friday) afternoon, which shows a huge change in mindset in a short period of time,” said Steve Sosnick, chief strategist at Interactive Brokers (NASDAQ:).

These developments, along with the ongoing war in Ukraine and Sunday’s French vote, add to the volatile atmosphere. President Emmanuel Macron is a centrist who faces Marine Le Pen as his far-right opponent. According to the latest polls, Macron is leading.

“Le Pen is a populist who’d be potentially anti-euro, and the fear is that it could be a shock along the magnitude of what Brexit was,” said Thomas Hayes, chairman of Great Hill Capital LLC. “If Le Pen wins, the knock-on implication is that they might withdraw from the European Union or that would be a possibility that’s on the table.”