U.S. stocks closed lower, with selling accelerating in late afternoon trade after oil broke below $40 a barrel and there was more evidence of a weak manufacturing sector in the Fed's Beige Book. ( Tweet This )
The sell-off began after Fed Chair Janet Yellen reaffirmed the case for a rate hike at the Fed's Dec. 16 meeting but reiterated that the decision will be data dependent.
"The question of whether the Fed is making a mistake still lingers out there," said Art Cashin, head of NYSE floor operations for UBS.
The Beige Book said economic activity grew at a modest pace in most regions. The Fed said consumer spending increased in nearly all districts while the manufacturing sector remained mixed, under continued pressure from the strong dollar, low commodity prices and weak global demand.
Traders also said the market was on edge because of a mass shooting in San Bernardino, California, during the afternoon trading session.
Art Hogan of Wunderlich Securities said the market was nervous about the shootings after the coordinated terrorist attacks in Paris last month. There was no evidence the California shootings were terror-related.
"It's hard to know but even if it's not, it sure feels like it," Hogan said. "First it's Paris, then it could be on our shores."
Stocks turned lower and extended losses after 2 p.m., ET, as oil broke $40 a barrel and the Beige Book raised concerns for some traders that economic growth was still sluggish.
Dow Jones industrial average intraday performance
WTI crude oil January '16 intraday performance
The S&P 500 closed down 1.1 percent with energy falling 3.1 percent to lead all 10 sectors lower. The Energy SPDR (XLE) had its worst day since Sept. 28.
The Dow Jones industrial average ended nearly 160 points lower, closing in negative territory for the year after ending higher for 2015 on Tuesday.
The Nasdaq composite closed about 0.6 percent lower after earlier trying to hold slight gains.
"People squaring up their positions and taking off some risk ahead of ECB and jobs Friday," said Jeremy Klein, chief market strategist at FBN Securities. He noted some traders could be concerned the European Central Bank's Thursday decision on monetary policy might not be as stimulative as the market has priced in.
"I just think (the Beige Book) another nail in the coffin in terms of a rate hike this month," said Peter Cardillo, chief market economist at First Standard Financial. He said most of the selling was due to oil.