Wall Street suffered its worst day of the year Thursday, one day after Federal Reserve Chairman Ben Bernanke raised fears that the central bank may be preparing to wind down its stimulus policies this year.
The Dow Jones industrial average tumbled 353 points, or 2.3 percent. That marked the biggest one-day point drop since November 2011. Including Wednesday's losses, the Dow has erased more than 550 points in two days.
Despite the punishing losses, the Dow has seen much darker days. It fell 778 points on Sept. 29, 2008, after Congress rejected a $700 billion plan to rescue the banking industry.
The S&P 500 sank 2.5 percent Thursday, logging its biggest percentage drop since November 2011. The Nasdaq sank more than 2.3 percent.
Bernanke lays his cards on the table. The rout came after Bernanke offered some of his most explicit guidance about when the central bank might start pulling back its stimulus.
Depending on how the economy performs, Bernanke said the Fed could begin tapering its bond buying later this year and end the program some time in 2014. At the same time, he said the Fed could step up its stimulus efforts if the economy take a turn for the worse.
While this is what most economists had predicted, investors seemed surprised to hear Bernanke spell it out in such detail.
"He offered more clarity and transparency than many had expected," said Art Hogan, managing director at Lazard Capital Markets.
It's going to be a bumpy ride. Dan Greenhaus, chief market strategist at BTIG in New York, said the initial reaction to Bernanke's comments was overdone. But he said a period of choppy trading is to be expected following the strong gains stocks booked earlier this year. All three indexes are still up between 11 percent and 12 percent for the year.
The Fed has been a major driver of the bull market, and traders say the shift in policy will continue to fuel volatility in the months ahead.
The VIX, a benchmark of investor anxiety, jumped 28 percent Thursday. And CNNMoney's Fear & Greed Index slid back into extreme fear.
"I think volatility is the new norm as investors in all asset classes try to re-price what the world looks like in the absence of quantitative easing," said Hogan. "That's not an easy thing to do."
Meanwhile, bond yields continued to move higher, with the 10-year Treasury yield rising as high as 2.46 percent. (Related: Bond yields spike to 2-year high)
The dollar rose versus its main trading partners as investors sought safety in cash. The strong dollar weighed on commodities that are priced in the U.S. currency. Gold prices plunged 6 percent to the lowest level since September 2010. Oil prices sank 3.3 percent to below $95 a barrel.
Major European markets fell by more than 3 percent. Asian markets also saw hefty losses after HSBC's flash purchasing managers' index for June showed Chinese manufacturing activity at a nine-month low. Hong Kong's Hang Seng and the Shanghei Composite both shed nearly 3 percent.
U.S. investors were also rattled by the lackluster reports out of China, noted Hogan. "The reaction to the Fed is not happening in a vacuum," he said.
In economic news, the government said the number of jobless claims rose more than expected in the latest week. A measure of manufacturing activity in the Philadelphia area surged to a two year high in June. Meanwhile, the National Association of Realtors said existing home sales in May rose 4.2 percent to an annual rate of 5.18 million, slightly better than expected.
Shares of major homebuilders were among the worst performers as investors fear rising mortgage rates will hurt the housing market. Toll Brothers, D.R. Horton and Lennar were all down sharply.
The sharp drop in gold prices weighed on shares of mining companies, including Newmont Mining and Freeport-McMoRan.
On the corporate front, drugstore chain Rite Aid swung to a profit but revenue declined in the latest quarter.
Tech giant Oracle reported earnings in line with forecasts but sales fell short of expectations. The company also doubled its dividend and announced a $12 billion stock buyback. Oracle also said it plans to move its listing to the New York Stock Exchange as of July 15..