Stocks are sinking for the third week in a row

Stocks fell on Friday, en route to their worst week of the year, as investors baulked at fresh government data that added to a cascade of signs showing inflation has returned.

The S&P 500 fell about 1.4 percent in afternoon trading, which lifted the stock index for its third straight week of declines and its worst weekly performance for the year, down more than 3 percent.

This came in a short week, with markets closed Monday for the President’s Day holiday. Tuesday’s trading marked the worst single day for the S&P 500 since mid-December.

The market shift this month came along with a sharp reassessment among investors about what the Federal Reserve needs to do to bring down inflation, and the damage it could do to businesses, consumers and the economy.

Stock markets rebounded during January as investors pinned their hopes on the possibility that the Federal Reserve would stop raising interest rates, after a sustained period of slowing inflation at the end of last year.

But that hope has been dashed in recent weeks by data showing employers kept hiring, consumers kept spending and inflation picked up again. On Friday, the latest reading of the personal consumption expenditures price index, which the Fed tracks closely, showed inflation accelerating faster than expected in January.

“I think the market reaction we’re seeing indicates very clearly that investors think the Fed has more work to do,” said Liz Ann Saunders, chief investment strategist at Charles Schwab.

The Federal Reserve has been raising interest rates for nearly a year, as it seeks to slow the economy and ease inflation. But higher interest rates also raise costs for companies, which usually affects share prices.

Investors have ramped up their expectations for how often the Fed will raise interest rates, and this week it boosted expectations of a three-quarter-point rate hike at the next three central bank meetings. At the beginning of the month, investors expected only one increase at the meeting in March. They’ve even started pricing in the possibility that the Fed will make a bigger hike in March by half a point.

In response, bond yields rose, with the two-year Treasury yield, a measure of government borrowing costs sensitive to changes in Fed policy, reaching a post-pandemic peak on Friday. The yield rose by more than a tenth of a percentage point, to 4.82 percent, its highest level since 2007. That was a big move for an asset that typically goes up and down by hundredths of a point each day.

The 10-year Treasury yield, which supports borrowing costs around the world, is close to 4 percent, a limit it has not risen above since November last year.

Amid the volatility, investors pulled money out of the markets, with nearly $9 billion withdrawn from funds buying US stocks in the seven days through Wednesday, according to data from EPFR Global. This has brought inflows from US stocks over the past three weeks to nearly $19 billion.

The selling has been widespread, with every sector of the S&P 500 seeing losses so far this month. Technology stocks, which are particularly sensitive to changes in interest rates, had outperformed at the start of the year but that has started to turn around recently. On Friday, the sector fell more than 2 percent, underperforming the broader market.

“The tug-of-war between bulls and bears has temporarily eased in favor of the bears,” said Mark Hackett, head of investment research at Nationwide.