Stocks closed sharply lower as worries about the mortgage market and broader economy triggered selling among nervous investors ahead of the holiday shopping season.
The Standard & Poor's 500 index fell 1.59% and has now lost all its gains for the year. Many investments such as mutual funds either track or are measured against the S&P 500.
The blue chip Dow Jones Industrial Average fell 1.6% and is down 9.6% from its mid-October trading high, close to a 10% drop that would constitute a correction. The Nasdaq fell 1.3% to a two-month low.
The worries over the economy sent investors rushing to the safety of government securities. The yield on the Treasury's 10-year note for a time fell below 4 percent for the first time since 2005. The shift into bonds came as the Dow briefly sank below the lows seen in the market's August pullback.
The stock market has been thrashing about recently as investors attempt to gauge how companies will fare amid a further slowdown in the U.S. housing market, deterioration of credit and record oil prices that crested overnight above $99 a barrel.
Stocks, which have fallen in seven of the previous nine sessions, haven't enjoyed the boost seen in recent years during Thanksgiving week, which is capped by the retail bonanza Black Friday.
Economic readings did little to instill confidence among investors. The Mortgage Bankers Association said mortgage application volume fell 3.6 percent last week. Meanwhile, the slump in housing suggested banks will continue to face souring mortgage debt.
Government-sponsored lender Freddie Mac, which reported a $2 billion quarterly loss Tuesday and saw shares plummet nearly 29 percent, declined again Wednesday after an analyst downgrade. Countrywide Financial, the nation's largest mortgage lender, lost further ground.
Financial stalwarts including Citibank and Fannie Mae fell hard, as did insurance giant American International Group, which dropped to a two-year low. Financials compose much of the backbone for the S&P 500, which briefly turned negative for the year before recovering.
In other economic news, the Conference Board suggested an economic slowdown could accelerate in the coming months amid rising costs and further weakness in the housing market. Also, the Reuters/University of Michigan consumer sentiment survey showed its lowest reading in two years -- an unwelcome development for retailers entering the most important months of the year.
The Commerce Department said jobless claims fell by 11,000 last week, a positive sign for U.S. employment, but the report didn't appear to alleviate anxiety about the potential for weaker consumer spending.
'People are buying and selling off the headlines. The market is so emotional," said Neil Hennessy, president and portfolio manager of Hennessy Funds. "You look at oil approaching $100. People are taking their money and going to the sidelines."
Investors turned to government bonds amid the uncertainty. The yield on the 10-year Treasury note, which moves inversely to its price, fell to 4.01 percent from 4.09 percent late Tuesday.
The dollar was mixed against most other major currencies, while gold advanced.
And with oil prices briefly reaching a high of $99.29 a barrel in overnight electronic trading, the question among investors is no longer if oil will reach $100 a barrel, but when -- and how long it will stay there. Crude futures fell 99 cents to $97.04 per barrel on the New York Mercantile Exchange after an Energy Department report showed supplies at a closely watched oil terminal in the Midwest rose for the first time in weeks.
'The high price of oil has hurt retail, entertainment, restaurants and clothing,' said Don Hodges, chairman of Hodges Capital Management in Dallas. He ttributes the market's recent retrenchment to concerns about energy, the consumer, housing and banking among other factors and notes that previous sharp drops in the market have occurred when investors have faced a similar confluence of worries.
Wednesday's pullback ahead of the Thanksgiving holiday came after stocks finished with a gain Tuesday following a somewhat baffling pair of reports from the Federal Reserve. The Fed's minutes from its last meeting called its last rate reduction a 'close call,' but the central bank's economic forecast seemed to imply it is willing to keep lowering rates.
Wall Street is fairly confident the Fed will lower rates at its Dec. 11 meeting to keep the tight credit markets liquid, but it is uncertain about the health of the economy -- particularly given big losses at Freddie Mac and its counterpart Fannie Mae, and possible liquidity problems at Countrywide.
Big gainers include E-Trade, which was continuing to recover from losses it sustained recently on bankruptcy rumors, and Ikon Office Solutions , which surged on the announcement of a $500 million share buyback. One of the largest losers of the day was juice maker Jamba , which saw a steep drop after an analyst downgrade. American Express and Intel also slipped on analyst downgrades.