Fears of a China-led global slowdown, softer U.S. data and a mixed bag of earnings news unleashed a selling wave that pushed stocks to their worst losses of the year.
Major stock indexes were down more than 1 percent in a major "risk-off" swoon, the dollar fell and Treasurys rallied. Emerging markets also reacted negatively to a Chinese purchasing managers report that showed an unexpected contraction in January, to 49.6, from 50.5 last month. Earlier in the week, China had reported slowing economic growth for the fourth quarter, with GDP easing to 7.7 percent form 7.8 percent.
"The catalyst today was you started out with China and there was a little bit of pile-on with some earnings reports and maybe coupled with a little bit of weakness in our reports today," said Jim Paulsen, chief investment strategist at Wells Capital Management. "I don't know that if any of those alone, without the China number, would be doing this today."
Paulsen noted that the MSCI emerging markets exchange-traded fund EEM was down nearly 3 percent, while U.S stocks were down a bit more than 1 percent. EWZ, the MSCI iShares Brazil ETF, was down 3.5 percent.
"It's an elevated concern with the Fed now on a tapering path that the real victim of tapering will be not so much be the United States but the emerging world. I do think that's what's dovetailing with that," he said. "Unlike the U.S. which seems to be accelerating, they're still in a state where they cant't get going again."
Treasurys saw fierce buying, with the 10-year yield falling to 2.77 percent, its lowest level since Dec. 3.
"This is the third-biggest volume day in the last six to eight weeks," said David Ader, chief Treasury strategist at CRT Capital. "The last big volume day was Jan. 10, nonfarm payroll day, also an up day; the last before that was Dec. 19, the Fed meeting, also an up day."
The reasons for the gains varied, he said.
"One was about the Fed, one was about data—and we're dealing with another element, which of course is what's happening to risk assets," Ader said.
January's choppy stock market has raised concerns among traders that January, as it often does, could set the tone for the year.