Stocks sold off across the board and the Dow plunged nearly 150 points after mixed economic data and the Fed's recent policy decision prompted investors to book gains.
"A day like today was inevitable," said Michael Cuggino, president of Permanent Portfolio Funds. "Stocks just don't grow to the sky. I would caution investors not to get overly concerned based on today's (economic) statistics."
The Dow Jones Industrial Average ended with the largest one-day decline since the steep 242-point selloff in early March. Tech weakness dragged the Nasdaq down 1.7% and the S&P 500 fell 1.4% and is now off 2.4% from the all-time record of 1,527.46 from March 2000.
"This is profit-taking," said Harry Clark, CEO of Clark Capital Management. "The market was very stretched with a record number of days up versus down days. We only had a correction of 5.8% earlier in the year. The market needs a correction -- it's due and it has to have one now. It's very healthy."
Investors were discouraged by economic data, which showed weak monthly retail sales and an unexpected rise in the U.S. trade deficit.
Market pros also attributed at least part of the day's declines to post-Fed meeting blues. The Federal Reserve voted Wednesday afternoon to keep rates at 5.25% and said inflation risks remain the chief concern for the central bank.
"People re-read the statement and realize they are still concerned about inflation and we give the gains back," said Barry Ritholtz, chief market strategist at Ritholtz Research.
The telecom services sector lost steam following a recent run and tech stocks were also weak. Selling was across the board with all of the S&P 500 sectors trading lower. Breadth was negative with decliners outpacing gainers by a three-to-one margin on both the NYSE and Nasdaq.
Selling hit high-flying stocks in cyclical sectors such as basic materials and energy. Alcoa led downside movers in the Dow, which was also hit by a 2% decline in Exxon Mobil .
IBM and McDonald's were among four of 30 Dow components to close in positive territory.
Selling accelerated for shares of biotech Amgen after an FDA advisory panel voted 15-2 in favor of further restrictions on the company's anemia drug franchise due to safety issues. Shares of Johnson & Johnson , which markets Amgen-developed anemia drug Procrit, declined 2%.
Whole Foods Markets dropped sharply after the organic grocery chain reported first-quarter profit fell 11.2% due to sluggish sales growth.
Wal-Mart Stores reported a 3.5% decline in April same-store sales, led by a 4.6% fall at its namesake stores, lower than the 1.1% expected by analysts surveyed by Thomson Financial. The world's largest retailer blamed the weakness on the weather and an earlier Easter than in 2006.
Viacom said earnings declined 36% in the first quarter due to higher film marketing costs and restructuring charges at its MTV division. Quarterly results exceeded analysts' expectations but the stock traded lower.
Light sweet crude futures rose slightly, closing up 0.4% on the New York Mercantile Exchange. Oil prices have gained in two of the last three sessions but remains down 5.9% in May.
In mixed economic news, the U.S. trade deficit rose more than expected in March to $63.89 billion, above economists' consensus forecast of $60 billion. The deficit rose to its highest level in six months, driven upward by a big increase in oil imports.
Jobless claims last week dropped by 9,000 to 297,000, an indication that employment remains strong. Claims for first-time unemployment benefits were expected to rise 10,000.
April same-store sales mostly came in below already lowered expectations.
Treasury prices rose, sending yields lower.
Europe Trades Lower But Asia Closes Up
European shares closed firmly lower after interest-rate decisions from the European Central Bank and the Bank of England. The ECB kept rates on hold at 3.75%, as expected, the fourth quarter-point hike since August.
The London FTSE-100 lost ground to finish lower, while the Paris CAC-40 and Frankfurt DAX fell as well.
Shares of German telecom giant Deutsche Telekom posted a 5.8% fall in first-quarter core earnings, in-line with expectations, due to a decline in its domestic fixed-line networks.
Paris-listed bank Societe Generale also reported a decline in first quarter net profit, of 1.9%, and there was speculation of a potential merger with Italian bank Unicredit. Shares of the bank declined despite the results being slightly ahead of analysts’ expectations.
Stocks in Korea and Australia each closed at new highs, leading Asian markets higher.
The Kospi closed above the 1,600 level for the first time in Seoul as shipbuilders such as Hyundai Heavy surged following brokerage upgrades while Posco gained on talk of consolidation in the global steel sector.
Australia's S&P/ASX 200 Index finished higher to set a record closing peak, propped up by Woolworths and some of the big banks, but Rio Tinto fell as talk of an imminent bid from rival BHP Billiton fizzled.
The Nikkei 225 Average closed little changed as Toyota Motor declined after the automaker posted a surprise fall in quarterly operating profit and forecast little growth this year. Investors booked profits on recent gainers such as shipping and resource-related shares, but bought shares of companies that reported solid earnings, including NTT Data and Secom.