Dow plummets 1032 points, now down 10% from record; S&P 500 drops 3.7% to new low for week

  • The Dow Jones industrial average closed more than 1,000 points lower.
  • The benchmark 10-year U.S. note yield rose to 2.88 percent before sliding to 2.851 percent Thursday.
  • A rise in yields and sharp moves in obscure volatility funds that use leverage have been cited by traders as reasons for the market's recent pullback and volatility spike.

Stocks fell sharply on Thursday as strong earnings and economic data were not enough to quell jitters on Wall Street about higher interest rates.

The Dow Jones industrial average closed 1,032.89 points lower at 23,860.46, entering correction territory. The 30-stock index also closed at its lowest level since Nov. 28. The Dow is also on track to post its biggest weekly decline since October 2008.

"This whole correction is really about rates. It's really about inflation creeping up. It's really about people thinking the Fed is either behind the curve or actually has to be more aggressive," Stephanie Link, global asset management managing director at TIAA, told CNBC's "Closing Bell."

"That fear, that unknown is really what's driving a lot of the anxiety," Link said.

This is the third drop for the Dow greater than 500 points in the last five days. Despite the decline Thursday, the average is still a ways from its low for the week hit on Tuesday of 23,778.74. American Express and Intel were the worst-performing stocks in the index, sliding more than 5.4 percent. J.P. Morgan Chase, meanwhile, was down by more than 4 percent.

The S&P 500 pulled back 3.75 percent to 2,581, reaching a new low for the week. The index also broke below its 100-day moving average and closed under 2,600, two important thresholds. For the S&P 500, it is its third drop of greater than 2 percent in the last five days.

The Nasdaq composite fell 3.9 percent to close at 6,777.16 as Facebook, Amazon and Microsoft all fell at least 4.5 percent.

"The market is focused on higher interest rates right now," said Kate Warne, investment strategist at Edward Jones. "The underlying fundamentals are going to drive stocks higher, but I think the path higher will be more volatile than it's been in the past few years."

The benchmark 10-year U.S. note yield rose to 2.88 percent before slipping to 2.848 percent Thursday, holding around multi-year highs. The initial move higher follows the release of strong jobless claims data. Weekly jobless claims hit a 45-year low, totaling 221,000. They fell from 230,000 in the previous week.

A rise in yields Wednesday led to the Dow posting its biggest one-day reversal since August 2015.

"The big news revolves around bond yields continuing their recent ascent," said Mark Newton, managing member at Newton Advisors. He also said 3.05 percent is a key level to watch on the 10-year. "Getting over 3.05 percent would indeed break the 30-year downtrend and be very important to suggesting yields should begin a long-term trend higher."

The rise in yields and sharp moves in obscure volatility funds that use leverage have been cited by traders as reasons for the market's recent pullback and volatility spike.

The Dow and S&P 500 capped off their worst weekly performance in two years last week after a stronger-than-expected jobs report sent interest rates higher. The decline on Wall Street picked up steam on Monday, with the Dow plummeting 1,175 points.

On Tuesday, the 30-stock index swung 1,167.5 points before closing 567 points higher. But the major indexes closed lower on Wednesday, failing to hold onto strong gains.

But Jack Ablin, chief investment officer at Cresset Wealth Advisors, characterized this pullback as "merely technical," noting: "Market valuations are expensive and need to correct. At the same time, credit conditions remain robust as the availability of money to borrow, spend and invest is strong. "

"While it's impossible to predict where the markets will meander on a day-to-day basis, we are confident that any pullback that plays out over the next few weeks represents a better opportunity to buy for the long run rather than a reason to sell," Ablin said.

Overseas markets have also been under pressure recently. In Japan, the Nikkei 225 index is down 10.3 percent from its 52-week high, putting it in correction territory. In Germany, the Dax index closed Thursday 9.83 percent below its 52-week high.

The major U.S. indexes tried for gains earlier in Thursday's session after the release of strong earnings data.

Twitter and Grubhub reported better-than-expected quarterly results. Twitter shares soared 12.2 percent, while Grubhub spiked 27.4 percent higher.

This corporate earnings season has been strong. Of the S&P 500 companies that had reported as of Thursday morning, 78 percent had announced better-than-expected earnings, according to Thomson Reuters I/B/E/S.

Jeff Zipper, managing director of investments at U.S. Bank Wealth Management, said he expects corporate earnings to be strong for the rest of the year, noting they'll get "some benefit from tax reform."

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—CNBC's Michelle Fox contributed to this report.