The Wall Street hangover from last week’s shocking inflation report continued into the new week, as Wall Street officially entered a bear market. The S&P 500 dropped 3.9% Monday, and is now down more than 20% from the record high it set in January. Monday marked the first time the S&P 500 has confirmed a bear market since the 2020 Wall Street plunge brought on by the COVID-19 pandemic.

As for other indexes, the Nasdaq Composite dropped 4.7%. The Dow Jones Industrial Average fell 2.8%.

According to that inflation report released last Friday, consumer prices rose 8.6% year over year in May, setting a new 40-year high for inflation, and erasing a drop in annual inflation from 8.5% in March to 8.3% in April.

“Until we actually start to see a peak in inflation and the expectation that inflation trends will be moderating, I think that investors will remain fairly concerned about equity prices,” CFRA Research Chief Investment Strategist Sam Stovall said Friday. “If we do end up slipping into recession, on average, bear markets accompanied by recessions have lasted an average of 15 months and have declined an average of 35%. So we possibly have further and longer to go.”

Despite the risk of a recession, investors expect the Federal Reserve will take more aggressive steps towards getting inflation under control. The Fed is scheduled to make its next policy announcement on Wednesday.

“If the Fed does decide to raise interest rates by 75 basis points at their upcoming FOMC meeting, investors might actually take that as a positive sign that the Fed is attempting to get ahead of the inflation curve,” Stovall said. “That was the sentiment that started this rally that recently fizzled out.”

According to CME’s FedWatch Tool, expectations for a 75 basis point hike have jumped to nearly 30% from 3.1% a week ago. By September, some traders are expecting a total of 175 basis points in interest rate hikes by September.

“People are starting to think inflation is becoming entrenched in the economy, which means it will likely need to be met with sharper policy actions from the Fed,” Horizon Investments Head Of Portfolio Management Zachary Hill said Monday. “And so I think what we saw at the end of last week and then price action today, is the market coming to grips with that fact.”

The Associated Press and Reuters contributed to this report.