Stocks dive on last day of September in worst closing since 2020

Equity markets fell back off a cliff on Friday after a rally on Thursday as investors continued to process ongoing interest rate hikes from the Federal Reserve.

The Dow Jones Industrial Average of stocks dropped more than 500 points to close at 28,725, falling below 29,000 for the first time since November 2020.  

Both the S&P 500 index and the technology-heavy Nasdaq Composite lost 1.5 percent of their value, with the S&P finishing at 3,585 and the Nasdaq at 10,575.

All three major indices are now squarely in bear market territory, marking a 20 percent decline off recent highs. The Dow is now down 22 percent since January, the S&P 500 down 25 percent, and the Nasdaq down more than 33 percent.

Many market commentators noted that this was the worst September for the S&P 500 in 20 years.

Friday marked the end of the third fiscal quarter for 2022. It’s the third quarter in a row that markets have seen broad-based declines, spurred on by interest rates hikes from the Fed that are intended to bring down inflation and slow activity across the economy.

But inflation, which U.S. central bankers and Treasury officials had initially characterized as transitory, has proven to be a persistent force within the economy, even as it roared back to life following widespread private-sector shutdowns in the wake of the coronavirus pandemic.

Most economists see the root cause of inflation to be disruptions in supply that led to surging demand as the economy reopened after the shutdowns. Some economists have argued that too much fiscal stimulus was pumped into the economy, leading to too much money chasing too few goods, while the Fed kept interest rates at zero and maintained a policy of quantitative easing.

Other economists have argued that the inflationary environment has allowed companies to artificially keep their prices higher than they should be, begetting even more inflation.

Regardless, the Fed has yet to break the back of inflation. The latest Consumer Price Index was up 8.3 percent annually, with core inflation rising 0.6 percent since last month — double what economists had been expecting.

“The era of cheap financing is coming to an end, at least for the time being, and at least until the Fed pushes the economy into a meaningful recession, at which point long-term rates will start to recede,” Dan Alpert, head of Westwood Capital, told The Hill in an interview. 

“The market is reacting to that because the impact on businesses, especially businesses that are interest rate-sensitive, is going to be negative, and businesses are going to have a difficult time expanding to the extent that they depend on borrowed funds.”

In a note to clients last week, analysts at Goldman Sachs indicated that many of their investors were banking on a “hard landing” — meaning a serious recession — at some point over the next year or two. They outlined a scenario in which the S&P 500 could fall as low as 3,100 in mid-2023.

Third-quarter earnings season begins in mid-October, and investors are likely adjusting their expectations for what companies brought in.