Specialist John Urbanowicz works on the floor of the New York Stock Exchange, Thursday, June 20, 2013. Financial markets are sliding after the Federal Reserve said it could end its huge bond-buying program by the middle of next year. (AP Photo/Richard Drew)
(USA TODAY) Stocks plunged further on Wall Street Thursday as investors continued to worry about the Federal Reserve pulling back on the massive bond-buying program that has helped fuel the economy and stock market.
The Dow Jones industrial average was down 1.5% in afternoon trading. The Standard & Poor's 500 index fell 1.6%, and the Nasdaq composite index dropped 1.6%.
The yield on the 10-year Treasury note jumped to 2.43%, the highest level in almost two years. Gold prices dropped more than 6% and oil prices fell below $96 a barrel in early trading.
DOWN, DOWN, DOWN: Gold, oil, bond prices dive
CLOBBERED: Interest-rate sensitive sectors hit hard
Global markets also tumbled Thursday as Japan's Nikkei 225 fell 1.7% and European indexes were down about 3%.
WHAT TO WATCH: Bonds may suffer, too, as Fed shifts
FEDERAL RESERVE: Bernanke sets course for easing up on stimulus
The market's volatile and negative reaction to the Fed's hints that the days of market-friendly stimulus are numbered is not too unexpected, given that the market is a forward-looking pricing mechanism that tends to price in events three to six months into the future, says Gary Thayer, chief macro strategist at Wells Fargo Advisors.
The market is undergoing a "change, a shift, a transition," which is causing a re-pricing of assets, he adds.
"Any sign of a change in policy tends to cause uncertainty," says Thayer, adding that heightened uncertainty often results in a market "over-reaction" to new information.
Part of the concern for stock investors is that they don't know how sharp the rise in interest rates will go. Higher rates are a negative for stocks because its raises borrowing costs, which is a drag on economic growth and the all-important housing market, which has been a key driver of the economic recovery.
"There's a (worry) that we have seen the lows in bond yields" says Thayer. "And that prompts investors to ask: 'Where will they go from here?'"
Thayer, though, thinks investors are overreacting to the Fed's eventual move to tighten monetary policy. "It's human nature" he says.
Thayer argues that the Fed's coming shift in policy is good news, as it is signaling an improving economy.
In economic news Thursday, existing home sales jumped 4.2% in May and the median price is up 15.4% from a year ago. Weekly jobless claims rose slightly, but the level remains consistent with moderate job growth.
Thayer says the fact that the Fed is considering cutting back now, when inflation is benign, is another positive sign. He thinks bond yields will stabilize and stock investors with longer-term horizons will start "looking for values created" by the Fed news. He is sticking with his year-end price target for the S&P 500, which he recently raised, to 1,650 to ,1700, or roughly 6% above current levels. In late afternoon trading, the broad market gauge was trading around 1,603.
Wall Street chart watchers are keeping an eye on key levels for the S&P 500 as an area of support, or a floor at which buyers came in earlier. Chris Verrone of Strategas Research Partners says there is near-term market support at 1,608, which was the low on June 13, and 1,598, which was the low on June 6.
The market turmoil began Wednesday when the Federal Reserve said the economy was strengthening and Chairman Ben Bernanke said the bank's bond purchases will likely slow down this year and end next year.
The Fed said it's keeping its stimulus at full throttle for now. It will continue to buy $85 billion a month in Treasuries and mortgage-backed securities until the labor market improves substantially. The purchases hold down long-term interest rates and have fueled the housing rebound and a blazing stock rally.
But the Fed could trim its bond purchases until they're halted by mid-2014, and that announcement drew a sharp reaction in financial markets.
On Wall Street on Wednesday, the Dow fell 1.4% to 15,112.19. The S&P 500 index fell 1.4 percent, to 1,628.93. The Nasdaq composite index fell 1.1 percent, to 3,443.20.
WEDNESDAY MARKETS: Stocks tumble as Bernanke discusses tapering
Overseas, Asian stock markets plummeted Thursday after the drop on Wall Street. Tokyo's Nikkei 225, the regional heavyweight, was down 230.64 points to 13,014.58. Hong Kong's Hang Seng index tumbled 2.9% to 20383.87, but the benchmark was also down after a private survey showed a slowdown in manufacturing in China for the month of June.
European markets also saw steep drops. Britain's benchmark FTSE 100 dropped 3.0% to 6,160. Germany's DAX dropped 3.3% to 7,928 and France's CAC-40 in France fell 3.7% to 3,699.
Benchmark oil for July delivery fell $3.00 to $95.22 per barrel in electronic trading on the New York Mercantile Exchange.
Contributing: Associated Press