Saqib Iqbal Ahmad

NEW YORK, (Reuters) – The recovery that saw U.S. stock prices surge from their lows last month has begun to falter as investors consider faster monetary policy tightening at the Federal Reserve and soaring inflation, along with ongoing geopolitical turmoil stemming out of the conflict in Ukraine.

It is currently down by 7% from the recent peak after a 50% reduction in its year-to date loss. The dramatic rally that took place during March was responsible for its dramatic fall of 3%. Stock and bond volatility is on the rise again. Deutsche Bank This week, (DE:), the largest Wall Street bank predicted a U.S. downturn. They also forecasted a 20% stock decline and an “transitory” 20 percent slump.

Markets are resilient and have historically had one of their best month for equities, April. We are now less than a week away from corporate earnings. Here is an overview of where the markets stand in the second quarter.

GRAPHIC: Rebound- https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwqgzbpo/Pasted%20image%201649252797681.png

The S&P 500 is down 6.5% year-to-date after a swoon of nearly 13% earlier in the year, though that rebound appears to be running out of steam.

The index’s recent wobble has come alongside forecasts for big rate hikes from Wall Street and a hawkish tilt from policymakers, as well as an inversion of key parts of the Treasury yield curve – a signal that has preceded past recessions.

Minutes of Wednesday’s Federal Reserve monetary policy meeting appeared to indicate that the Federal Reserve will be able to raise interest rates further down the track and trim the Fed’s budget by $95 billion each month later in this year.

GRAPHIC: U.S. Financial Conditions- https://fingfx.thomsonreuters.com/gfx/mkt/znvneqmyzpl/Pasted%20image%201649268280384.png

The worries about the outlook for stocks come amid a tightening in financial conditions – the umbrella phrase for how metrics such as exchange rates, equity swings and borrowing costs affect the availability of funding in the economy.

GRAPHIC: Different roads- https://fingfx.thomsonreuters.com/gfx/mkt/byvrjbnwnve/Pasted%20image%201649252054580.png

Stocks’ volatility continues to rise.

Although it has risen in recent sessions after equities surged, the Cboe Volatility Index fell last month. However, it is still 12 points lower than its March close high. Treasury market volatility is still high as yields continue their upward trend.

GRAPHIC: Short stack- https://graphics.reuters.com/USA-STOCKS/REBOUND/lbvgnmmqkpq/chart.png

At the same time, bearish bets against the S&P 500 have declined from recent peaks, though they remain near recent highs. According to some market observers, high levels of short interest along with signs of defensive position such as substantial cash amounts, could be an indicator of stronger stock performance.

GRAPHIC: AAII Sentiment Survey- https://fingfx.thomsonreuters.com/gfx/mkt/klpykjlywpg/Pasted%20image%201649252971512.png

A lot of people argue that recessions can be avoided and signals like yield curve inversions, which are not good tools to predict stock performance, could prove untrue.

The S&P 500 has risen by an average of 11% in the 12-months following five out of the past seven inversions, said Keith Lerner, co-chief investment officer at Truist Advisory Services, in a recent note.

The sentiment among retail investors seems to be improving. The American Association of Individual Investors Sentiment Survey (AAII) revealed that for the first week since January, investors are more bullish than bearish.

GRAPHIC: Seasonally strong- https://graphics.reuters.com/USA-STOCKS/REBOUND/myvmnqygapr/chart.png

At the same time, the S&P has logged an average gain of 1.5% in April since 1928, making it the second strongest month of the year for stocks, and has now been a positive month for equities for nine straight years.

Much will depend on the corporate results in the coming weeks. According to Refinitiv’s I/B/E/S data, analysts note that the growth outlook has not changed much in the past months despite volatility in the stock markets. The first quarter earnings growth forecast is 6.4%. This compares to 7.5% at start of year.