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.
"This is reflective of the ongoing churn we've seen for the last three weeks," said Peter Boockvar, strategist with Lindsey Group. "Without QE this year, the warts are exposed—whether it's China, whether it's corporate earnings. The earnings seem to be very mixed, this is the kind of action you get."
"I know there's a lot of optimism for global growth this year, but if emerging markets are where it happens, they are showing signs of [problems], and the biggest one is China," he said.
Traders were watching action in emerging market currencies, such as Argentina, where the peso fell as much as 20 percent against the dollar Thursday, and Turkey, where intervention failed to stem losses in the lira. It was down about 1.5 percent.
"EM has been under pressure all year," said Win Thin, senior currency strategist at Brown Brothers Harriman. "Today, I think it has intensified. Argentina [is] running out of dollars. The central bank had been managing its fall, but they're running low on dollars. The peso was down as much as 20 percent today, but now it's down about 12 percent."
Thin said higher-quality markets, including Chile and Mexico, also saw their currencies slump.
"It seems this pressure won't be sustained, but it's one of those bad old days—equities down, EM down, Treasurys up," he said. "I'm surprised if this kind of selling is sustained."
Bank of America Merrill Lynch's monthly fund managers survey, released Tuesday, showed that U.S. managers are more bearish on U.S. stocks, with 37 percent seeing them as overvalued—one of the highest readings in the past 14 years, according to Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
Meanwhile, the fund managers in BofA's global survey were more bullish on the global economy, with 75 percent expecting it to improve this year, up from 71 percent last month. Seventy-two percent saw U.S. stocks as overvalued, and a net 7 percent saw stocks as overvalued, the highest level since 2000.
"If you were really standing back and trying to describe the concerns and investor positioning, it's very much the 'if it ain't broke, don't fix it' mentality out there," Hartnett said.
"What you're always on the lookout for is events that could change the mood," he added. "If you're a bull you've really got to say, 'Look, there's more to go,' because there's a lot of corporate cash that can be deployed in the economy and investor cash that can be deployed in the market."
The calls for 2014 from Wall Street's top strategists range from a flat market this year based on their S&P 500 targets to a rise of 10 percent to 15 percent. A sampling of their forecasts is in the chart.
Hartnett said it's interesting that none of the strategists see a lasting decline in stocks. Some, like Bob Doll of Nuveen, expect a 10 percent drop before the S&P resumes its rise to end the year at 1,950.
"I think the best case for the bears is that no one's looking for the market to fall," Hartnett said. "The best case for the bulls is the survey shows there's a lot of cash on the sidelines."
The market is becoming more expensive, he added, and value investors are having a tough time finding opportunities.
"One of the biggest pain trades for the past five years is long volatility," Hartnett said.
Even so, he added, "plenty of things could go wrong: the Middle East, China, housing in the U.S. But ... central banks have to lose some credibility for volatility to pick up. You either need a 1994, where the Fed looked behind the curve, or a 1998 event, where emerging markets forced easing by the Fed."
Even with big names missing this earnings season, the fourth quarter had a pickup in positive surprises on the top line compared with the third. Though revenue growth is weak, about 66 percent have beaten revenue targets.
Earnings are expected to increase 7.2 percent this quarter, based on actual reports and estimates for companies yet to report, according to Thomson Reuters.
—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.