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U.S. stocks dropped sharply Friday, with major indexes posting their lowest finishes since 2020 and logging a third straight quarterly decline as investors grew more fearful that aggressive interest rate hikes by the Federal Reserve will drive the economy into a downturn in an attempt to quell inflation.

What’s happening
  • The Dow Jones Industrial Average

    dropped 500.10 points, or 1.7%, to close at 28,725.51.

  • The S&P 500

    dropped 54.85 points, or 1.5%, to end at 3,585.61.

  • The Nasdaq Composite

    shed 161.88 points, of 1.5%, finishing at 10,575.61.

The drop left the Dow and S&P 500 at their lowest since November 2020, while the Nasdaq posted its lowest close since July 29, 2020. The Dow dropped 8.8% in September, while the S&P 500 tumbled 9.3% and the Nasdaq lost 10.5%.

For the quarter, the Dow dropped 6.7%, the S&P 500 declined 5.3% and the Nasdaq gave up 4.1%.

What’s driving the market

In keeping with the historical pattern, U.S. stocks suffered during the month of September as an assertive Federal Reserve helped push Treasury yields and the dollar higher, which in turn undermined equity valuations.

See: It’s the worst September for stocks since 2008. What that means for October.

Investors on Friday digested a reading from the personal consumption expenditure inflation index for August, which showed that core consumer prices climbed by 0.6% last month, more than Wall Street’s forecast of 0.5%. The core inflation measure excludes volatile food and energy prices.

See: Cheaper gas holds down inflation, PCE shows, but the cost of everything else is still going up fast

“That means the Fed will remain hell-bent on killing inflation. And the best way to do that is to increase rates, kill the housing market, and get rental costs down. The PCE doesn’t have housing and rents as a big component as the CPI does, so the fact that it is rising is a warning sign,” said Louis Navellier, founder of Navellier & Associates, in emailed comments.

Read: Will October be another stock-market ‘bear killer’? Why investors need to tread carefully around seasonal trends.

The reading largely confirmed similar data from the consumer-price index, another closely watched inflation barometer, which sent stocks lower earlier this month. Since that report was released just over two weeks ago, the S&P 500 has fallen more than 10%.

Helping to underscore this point, data out of the eurozone showed inflation accelerated at a record pace last month.

See: Eurozone Inflation posts new record high of 10% in September

In other news, investors also heard from Fed Vice Chair Lael Brainard, who reiterated that the central bank would keep interest rates elevated to combat inflation, even if it harms the economy.

See: Fed won’t pull back from rate hikes prematurely, Brainard says

Since it will take time for high interest rates to bring inflation down, Brainard said the Fed is “committed to avoiding pulling back prematurely.”

Investors were also keeping an eye on megacap tech stocks. Apple Inc. AAPL fell 3% on Friday after leading markets lower a day earlier following a downgrade by Bank of America.

Need to know: Here’s why investors should start betting on Apple and the stock market now

A final reading on the University of Michigan consumer-sentiment index for September showed consumers’ view of the economy improved somewhat during the month due to falling gas prices, even as their outlook remained broadly pessimistic.

Investors are now facing “what may be one of the most important earning seasons in a very long time, with a major rally in the cards if earnings don’t disappoint, and if the bears are right, lead to a further leg down if earnings disappoint and 4th quarter estimates are cut,” Navellier said.

See: U.S. consumers remain pessimistic about economy even as inflation fears wane

Stocks in focus

— Steve Goldstein and Barbara Kollmeyer contributed to this article

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