Stocks nose-dive as DC budget deal revives fear of Fed stimulus easing

Stocks dropped for a second day on Wednesday, with the S&P 500 and Nasdaq seeing their biggest losses in nearly five weeks, as the provisional budget deal in Washington raised speculation that the Federal Reserve could pull back on its stimulus program soon.

The Dow Jones Industrial Average closed 129 points down, with Nike and UnitedHealth leading the blue-chip laggards, while Visa climbed.

The S&P 500 fell 20 points and the tech-heavy Nasdaq slumped 56 points -- both of them over 1 percent. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, spiked above 15.

Most key S&P sectors were in the red, dragged by health care and materials.

Late Tuesday, Senate Democrats and Republicans reached a deal to reduce automatic spending cuts and the deficit levels by $23 billion over two years.

The bipartisan budget agreement still needs to pass a vote in the Republican-controlled House, expected to take place by Friday, as well as a vote in the Democrat-controlled Senate shortly thereafter. Analysts told CNBC they believed the deal would be passed with policymakers looking to avert another damaging government shutdown like the one seen in October.

Investors have also been focused over the timing of a reduction in the U.S. Federal Reserve's stimulus program and will be looking ahead to the Federal Open Market Committee's (FOMC) last policy meeting of the year, next Tuesday and Wednesday.

The Fed's $85 billion monthly bond purchases have buoyed markets in recent months, but investors fear the Fed will slow down that stimulus as the U.S. economy improves.

Separately, Dow Jones reported that the White House is close to nominating former Bank of Israel Governor Stanley Fischer as vice chair to the Federal Reserve.

MasterCard jumped after the credit card company announced a 10-for-1 stock split and raised its quarterly dividend by 83 percent. The company also announced a new $3.5 billion buyback program. MasterCard's shares have gained almost 60 percent this year. Rival Visa also traded higher.

Pandora tumbled sharply after rival Spotify launched a free music service for smart phones and tablets and confirmed it will offer a free version of its service for mobile phones and tablets. In addition, Spotify signed an exclusive deal that will bring Led Zeppelin's back catalogue to the streaming service.

Costco slid after the wholesale retailer posted earnings that missed expectations due to lower gasoline prices and weaker foreign currencies.

Hotel chain Hilton Worldwide was expected to announce the final pricing for its initial public offering after the closing bell. The company is expected to price at $20 a share, in the middle of its range, according to sources.

Weekly mortgage applications rose slightly in the previous week, reversing five-consecutive weeks of declines, according to the Mortgage Bankers Association.

The government auctioned $21 billion in 10-year notes, at a high yield of 2.824 percent. The bid-to-cover ratio, an indicator of demand, was 2.61. This auction is a second leg of a three-part $64-billion sale of government debt this week and will be followed by a $13 billion reopening of a 30-year bond issue on Thursday.