Adam Shell and Matt Krantz, USA TODAY
Stocks plunged Thursday as investors reacted for the second day to the Federal Reserve signaling it may pull back later this year on its massive bond buying that has helped fuel the economy.
The Dow Jones industrial average closed down 353.87 points, 2.3%, to 14,758.32 -- its biggest one-day point drop since Nov. 9, 2011 -- when it ended down 389 points. The broader Standard & Poor's 500 finished down 40.74 points, a drop of 2.6%, to 1,588.19 and below the psychologically significant 1,600 mark. The tech-laden Nasdaq composite index dropped 78.57 points, 2.3%, to 3,364.64.
The blue-chip Dow is now 5% lower than its all-time high set in late May. And it's the eighth straight day of triple-digit moves up or down in the Dow, the longest such streak since early October 2011.
The yield on the 10-year Treasury note jumped to 2.42%, the highest level in 22 months. Gold prices plummeted more than 6.9%, $94, to $1,280 an ounce. And oil prices fell to about $93.45 a barrel, a 3.9% decline for the day.
Investors are reacting so negatively because fear is setting in on how well the market can do without the intervention of the Fed, says Michael Farr of Farr, Miller & Washington. "The reaction we're seeing should be expected after five years of dependency on Fed intervention and monentary policy," Miller says.
The transition of the market to stand on its own two feet, rather than counting on easy money from the Fed, is hammering investors who piled into risky stocks that were riding the wave of quantitative easing, he says. "Risky stocks are no place to be right now," he says.
Global markets also tumbled Thursday as Japan's Nikkei 225 fell 1.7% and benchmark European indexes were down about 3%. Hong Kong's benchmark index ended down nearly 3% on concerns about China's economic growth easing up.
U.S. investors are being swept up in a global market adjustment of global markets to a period of rising rates, says Doug Sandler of RiverFront Investment Group. Global investors who have placed large and risky bets dependant on low global interest rates and using borrowed money are having these bets go against them, forcing them to sell, he says. "Where it all blow up is when rates change dramatically," he says. "This has the smell of a distressed leveraged selling."
The selloff in U.S. markets will likely be swift. But investors at the epicenter of the crisis, emerging markets, will likely have a more painful selloff to endure.
The market's volatile and negative reaction to the Fed's hints that the days of market-friendly stimulus are numbered is not too unexpected, given that the market is a forward-looking pricing mechanism that tends to price in events three to six months into the future, says Gary Thayer, chief macro strategist at Wells Fargo Advisors.
The market is undergoing a "change, a shift, a transition," which is causing a re-pricing of assets, he adds.
"Any sign of a change in policy tends to cause uncertainty," says Thayer, adding that heightened uncertainty often results in a market "over-reaction" to new information.
Part of the concern for stock investors is that they don't know how sharp the rise in interest rates will go. Higher rates are a negative for stocks because its raises borrowing costs, which is a drag on economic growth and the all-important housing market, which has been a key driver of the economic recovery.
"There's a (worry) that we have seen the lows in bond yields" says Thayer. "And that prompts investors to ask: 'Where will they go from here?'"
Thayer, though, thinks investors are overreacting to the Fed's eventual move to tighten monetary policy. "It's human nature" he says.
Thayer argues that the Fed's coming shift in policy is good news, as it is signaling an improving economy.
In economic news Thursday, existing home sales jumped 4.2% in May and the median price is up 15.4% from a year ago. Weekly jobless claims rose slightly, but the level remains consistent with moderate job growth.
Thayer says the fact that the Fed is considering cutting back now, when inflation is benign, is another positive sign. He thinks bond yields will stabilize and stock investors with longer-term horizons will start "looking for values created" by the Fed news. He is sticking with his year-end price target for the S&P 500, which he recently raised, to 1,650 to 1,700, or roughly 6% above current levels.
The market turmoil began Wednesday when the Fed said the economy was strengthening and Bernanke said the bank's bond purchases will likely slow down this year and end next year.
The Fed said it's keeping its stimulus at full throttle for now. It will continue to buy $85 billion a month in Treasuries and mortgage-backed securities until the labor market improves substantially. The purchases hold down long-term rates and have fueled the housing rebound and a blazing stock rally.
But the Fed could trim its bond purchases until they're halted by mid-2014, and that announcement drew a sharp reaction in financial markets.
On Wall Street on Wednesday, the Dow fell 1.4% to 15,112.19. The S&P 500 fell 1.4% to 1,628.93. The Nasdaq dropped 1.1% to close at 3,443.20.
verseas, Asian stock markets plummeted Thursday after the drop on Wall Street. Tokyo's Nikkei 225, the regional heavyweight, was down 230.64 points to 13,014.58. Hong Kong's Hang Seng index tumbled 2.9% to 20383.87, but the benchmark was also down after a private survey showed a slowdown in manufacturing in China for the month of June.
European markets also saw steep drops. Britain's benchmark FTSE 100 dropped 3% to 6,160. Germany's DAX dropped 3.3% to 7,928 and France's CAC-40 in France fell 3.7% to 3,699.