Stocks closed sharply lower, and the Dow saw its biggest decline since the market meltdown in late February, as disappointing news from the housing industry renewed concerns about credit markets and the U.S. economy.
"Nobody knows whose credit is worth what," said Art Cashin, director of floor operations at UBS. "Watch what happens here--if this rally rolls over and we head back to the lows, we're in trouble."
The Dow Jones Industrial Average closed with a loss of 2.3% after falling as much as 449 points, or 3.3%, earlier in the session. The blue chip index remains up 8.1% year to date. The S&P 500 fell 2.3% while the Nasdaq Composite declined 1.8%.
Some money managers remained optimistic, however, viewing Thursday's big move to the downside as healthy for the market.
"This is just one more of the period panics that we've had in the last six months," said Barton Biggs, managing partner at Traxis Partners. "The puncture of the debt bubble is a positive development and restores some kind of sanity to the debt market. I don't think stocks are going out the window by any means at all."
The sharp selloff triggered trading curbs on the NYSE prohibiting certain types of computerized index arbitrage trading. Curbs were also in effect in Tuesday's session.
Thursday's slump in U.S. stocks triggered selling in international markets, particularly emerging markets. Mexico's benchmark IPC stock index ended with a 3.6% decline while Brazil's Bovespa index sank 3.8%.
New home sales fell by 6.6% in June, far worse than the 1.6% decline analysts were expecting, according to a survey conducted by CNBC and Dow Jones. The median price of a new home also dropped to $237,900 from $241,000 the previous month.
"We had some homebuilders report terrible numbers and the price of a barrel of oil finally got to a level where there is some shock value," said Arthur Hogan, managing director at Jefferies.
Selling pressure was across the board with all 10 economic sectors tracked by S&P trading down 1.3% or more. Energy was the day's worst performing sector, falling 3.7% due to lackluster earnings from Exxon Mobil and a reversal in crude prices.
Basic materials stocks were not far behind, falling 3.6%, while financial stocks closed with a loss of 2.4%. Technology and consumer staples stocks held up relatively well.
"You're looking at a housing slump, credit worries and higher oil prices," said Matthew McCall, president of Penn Financial Group. "You put those three together, that's trumping better earnings right now. I really believe that this market maybe bottoms today or tomorrow, but there's going to be a great buying opportunity on this volatility in the coming week."
Investors sought safety in the fixed income market and bid up Treasurys, sending yields on the benchmark 10-year bond below 4.8%.
Results from Beazer Homes didn't help sentiment. The company, which is facing a deteriorating U.S. housing market and federal investigations into lending practices, posted a quarterly loss of $3.20 a share. That was significantly worse than than Wall Street estimates for a loss of 32 cents a share, according to Thomson Financial.
And homebuilder DR Horton posted a steep loss for its fiscal third quarter as the company recorded enormous charges to write down the value of unsold inventory and deposits on land. The company posted a loss of $823.8 million, or $2.62 a share, far worse than the loss of 35 cents a share analysts were expecting, according to Thomson Financial.
New York light crude futures hovered around $77 a barrel on supply concerns.
Ford Motor surprised Wall Street with second-quarter earnings of $750 million, its first profitable quarter in two years. The company also confirmed it is exploring the sale of its Jaguar and Land Rover subsidiaries.
Shares of Exxon Mobil fell sharply after the oil giant posted a 1% drop in quarterly earnings, missing expectations. The company said weaker natural gas prices and production offset higher margins from production of gasoline and chemicals. Production on an oil-equivalent basis fell 1% from a year ago.
Shares of Apple rose following stellar results from the technology giant Wednesday. The company continued to benefit from the strong iPod sales, but also reported selling 270,000 of its new iPhones.
Dow Chemical added to the positive earnings picture as it beat analysts' forecasts with its second-quarter profit.
And drugmaker AstraZenecaraised its full-year forecast and posted a 17% rise in second-quarter adjusted earnings.
In other economic news, the number of people claiming unemployment benefits for the first time fell by 2000 to 301,000. The amount of durable goods ordered in June rose by 1.4%, just shy of the 1.6% increase expected.
European Stocks Close Sharply Lower
European stocks suffered their biggest daily decline in more than four months on a deteriorating climate for financing takeovers and concerns about the U.S. housing market.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX all finished firmly lower.
Among the companies reporting upbeat earnings was Royal Dutch Shell, which beat analysts' expectations due to strong refining margins canceling out slower production levels.
Meanwhile shares in EADS fell 0.3% in Paris despite early gains following news second-quarter earnings fell less than expected. The Airbus parent also reported a 500 million euro ($685 million) charge for the redesign of its new Airbus passenger jet.
Shares of BT led the losers on the FTSE-100 despite the telecom giant posting a 3% increase in first-quarter operating earnings and meeting expectations as CEO Ben Verwaayen told CNBC margins are being squeezed.
And Spanish bank Santander beat analysts' expectations with its first-half net profit, but the positive numbers were helped by a one-off asset sale.
Asia Mostly Lower
Asian markets were mostly lower in the afternoon session Thursday with Japan and Australia both ending weaker. South Korea's KOSPI closed 2% down, its biggest drop in over four months.
Tokyo's Nikkei 225 Average fell to its lowest close in nearly two months as Advantest tumbled on lower quarterly profit, and caution ahead of Sunday's parliamentary election weighed. But Nomura Holdings and Terumo surged after they posted solid earnings.
And strong digital camera sales and a weak yen covered losses at Sony's computer game unit, leaving the technology giant's quarterly profit three times higher than the same quarter the previous year.
South Korean shares retreated from a record to slump 2%, on worries shares such as steelmaker POSCO had gained too much, while surging oil prices hit power provider KEPCO. It was the KOSPI'sbiggest one-day percentage drop since since falling 2.7% on March 5.
China's Shanghai Composite Index hit a record intraday high but pared gains by the close, as investors became wary of lofty valuations and government policy.
Hong Kong blue chips and China plays rose, buoyed by Wall Street advances, as mainland insurers surged on newly issued rules allowing them to invest 15% of their assets abroad. Newcomer Tiangong International, China's top maker of high speed steel by volume, exceeded expectations by nearly doubling in its debut after a US$106 million Hong Kong initial public offering that drew heavy demand.