The Dow Jones industrial average fell 265 points, and all the major indexes fell more than 2 percent and are now showing losses for the year. The Dow has now fallen four days out of five, and it has lost almost 320 points in just the past two days. Meanwhile, the yield on the Treasury's 10-year note fell to its lowest level since March 2009 as investors avoided stocks and sought the safety of government securities.
Only 442 stocks rose on the New York Stock Exchange, while 2,627 fell, a sign that investors expect all businesses to suffer if the economy continues to weaken.
Investors' gloom deepened a day after the Federal Reserve said it would begin buying government bonds as a way to stimulate the economy. News of slower industrial growth in China and a disappointing economic indicator in Japan helped send stocks plunging first in Asia, then in Europe.
The economic news in the U.S. was also troubling. The Commerce Department said the trade deficit widened in June to its highest level in 20 months as exports dipped. Falling exports mean U.S. manufacturing could be slowing down. And early this year, manufacturing showed the most consistent signs of recovery.
Investors got more bad news after trading ended. Cisco Systems Inc.'s revenue in the company's latest quarter fell short of analysts' expectations. Companies' revenue shortfalls have sent stocks falling over the past month, and Cisco's stock slid 8 percent in after-hours trading. Other stocks fell as well, and the report was likely to touch off more selling across the market on Thursday.
Stock traders tend to buy and sell based on their expectations for what business will be like in six to nine months. The problem is that economic data has been so muddled lately that investors have no sense of whether the recovery will hold. In its economic assessment statement on Tuesday, the Fed was still talking about a recovery, although the central bank said it would more modest than forecast in June.
"Uncertainty, uncertainty, uncertainty," was the way that Javier Perez-Santalla, managing director for futures and foreign exchange at the institutional brokerage firm Dinosaur Group, described the mood in the market.
"Everyone is scratching their heads, saying 'which way?'" Perez-Santalla said. "We're kind of stuck in this no man's land, where we're damned if we do, damned if we don't."
The Fed said Tuesday it will start buying government bonds with money it gets from the maturing mortgage-backed bonds that it bought during the recession. The goal is to try to cut interest rates on mortgages and corporate loans and in turn increase lending and help the economy grow faster.
But the Fed's moves were expected to be quite small in comparison to what the economy needs. And many investors were selling because the debt purchases would have only a limited impact on the economy.
The Dow dropped 265.42, or 2.5 percent, to 10,378.83, its largest slide since it fell 268.22 on June 29.
The Standard & Poor's 500 index fell 31.59, or 2.8 percent, to 1,089.47. The S&P 500 slipped below 1,100, a key psychological level. Falling and holding below that level could lead to more selling as computer-driven trading sets in.
The Nasdaq composite index fell 68.54, or 3 percent, to 2,208.63. The Nasdaq tends to have the biggest losses when stocks are falling sharply because many of its component companies are smaller businesses that struggle the most in a weak economy.
The Dow is now down 0.5 percent for 2010, while the S&P 500 is down 2.3 percent and the Nasdaq is down 2.7 percent.
Consolidated volume was fairly light on the NYSE at 4.6 billion shares, up from Tuesday's 4 billion. Trading has been particularly slow, even by summer standards as uncertainty about the economy led many investors to exit the market completely. Low volume also can exaggerate swings in the market.
The Chicago Board Options Exchange's Volatility Index rose 3.02, or 13.5 percent, to 25.39. The VIX is known as the market's fear gauge because a rise signals traders are expecting more drops in stocks. It is still well below the record of 89.5 it reached during the height of the financial crisis in 2008.
The yield on the 10-year Treasury note, which moves opposite its price, fell as low as 2.68 percent before edging up to 2.69 percent late Wednesday. That was down sharply from late Tuesday's 2.77 percent. Interest rates are often set based on the yield of 10-year Treasurys.
The 10-year yield is at levels not touched since late March 2009 just weeks after recession worries sent the stock market to a 12-year low. Investors were willing to take a lower return from Treasurys in exchange for the safety of government debt.
Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, described the bond market as "saying major problems are still out there."
Britain's FTSE 100 fell 2.4 percent, Germany's DAX index dropped 2.1 percent, and France's CAC-40 fell 2.7 percent. Japan's Nikkei stock average dropped 2.7 percent.
Although recent earnings report were overall strong, the market has been rattled when companies' revenue has fallen short of expectations. Their concern is that companies are selling less because consumers aren't buying.
Cisco's revenue was slightly off of forecasts, but that was enough to send the company's stock down $1.90, or 8 percent, to $21.83 in after-hours trading. During regular trading, it was down 58 cents.
Stocks will struggle to rally further until some of the uncertainty is removed about the strength of the economy and how government policy could affect companies, said Duncan Richardson, chief equity investment officer of Eaton Vance.
"What's lacking is confidence and no one can have confidence in an uncertain world," Richardson said. There has been a "huge reluctance to reinvest in businesses because of uncertainty."
Companies are hesitant to hire new workers, buy new equipment or acquire new businesses to grow operations until there is more confidence, he said.