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Dow slumps over 2 percent in worst trading day this year

Traders work on the floor at the New York Stock Exchange June 20, the worst trading day in 2013. The Dow dropped 2.3 percent and the S&P dropped 2.5 percent.BRENDAN MCDERMID / Reuters

Stocks crumpled Thursday, with the Dow shedding more than 350 points, under the weight of worries that the Federal Reserve would throttle back on easy money policies that have helped fuel the recovery.

Concerns about China’s economy added fuel to the selling, which began in the U.S. Wednesday and spread swiftly around the globe to come full circle back to U.S. markets Thursday.

It was a day of superlatives: the U.S. markets’ worst day so far this year and the biggest percentage drop – at 2.34 percent - for the Dow since Nov. 7, 2012, the day after President Obama was reelected.

The Dow Jones Industrial Average plummeted 353.87 points, or 2.34 percent, to 14,758.32. The broader S&P 500 Index fell 40.74 points, or 2.50 percent, to 1,588.19. The tech-heavy NASDAQ dropped 78.57 points, or 2.28 percent, to 3,364.63.

The Dow sell-off alone had wiped out more than $120 billion of investors' capital since Fed Chairman Ben Bernanke's comments on Wednesday afternoon. In the last two days, the Dow and the S&P 500 have lost all of their gains for May and June combined.

The VIX, which is the financial markets’ so-called anxiety gauge, hit 20 for the first time this year.

A day after Bernanke hinted the central bank may scale back its asset purchases later this year, the world's markets were in turmoil.

European shares closed deeply in the red across the board with the FTSEurofirst 300 index falling nearly 3 percent. Markets in Asia were slammed, with the Japanese Nikkei closing down nearly 2 percent. South Korea's Kospi and the Shanghai Composite traded near 2013 lows.

Despite positive news on the U.S. housing front, higher than expected U.S. jobless numbers added to the gloomy atmosphere on the markets and benchmark Treasury yields were near their highest in almost two years.

All three major averages are back in negative territory for the week, and on track for their fourth-weekly decline in the last five weeks.

"Despite the sell-off yesterday, you saw the cyclical names holding on that's considered important because it's more indicative of the underlying strength of the economy," noted Quincy Krosby, market strategist at Prudential Financial.

"We shouldn't be surprised by what the Fed said yesterday—Bernanke had already mentioned this in his speech back in May and we saw an immediate reaction in the bond market," said Krosby. "We haven't had a meaningful correction in the market and if this selloff continues…it doesn't mean the market is going to collapse; it is essentially recalibrating—the road to normal is going to be filled with detours."

Fed policymakers said in a statement Wednesday that the central bank would keep buying $85 billion in bonds a month. But in a press conference, Bernanke said if the economy continues to improve, the central bank could could start winding down its asset-purchasing program towards the end of 2013 and wrap up in 2014.

"The FOMC [Federal Open Market Committee] was more hawkish than we had expected," wrote Goldman Sachs economists Jan Hatzius and Sven Jari Stehn. "Our takeaway is that the risk to our forecast of quantitative easing tapering starting in December has increased."

Bernanke's comments sparked a huge selloff Wednesday, with the Dow closing down more than 200 points. The benchmark 10-year yield continued to rise even further Thursday to 2.469 percent, hitting its highest level since August 2011. Gold prices tumbled to their lowest in more than 2-1/2 years and silver fell more than 6 percent.

European shares closed deeply in the red across the board with the FTSEurofirst 300 index falling nearly 3 percent. Markets in Asia were slammed, with the Japanese Nikkei closing down nearly 2 percent. South Korea's Kospi and the Shanghai Composite traded near 2013 lows.

Adding to woes in Asia, China's HSBC Flash Purchasing Manager's Index, a preliminary reading of manufacturing activity, fell to a nine-month low in June.

On the economic front, existing home sale jumped 4.2 percent in May to an annual rate of 5.18 million units, rising to its highest level in 3-1/2 years, according to the National Association of Realtors. And factory activity in the mid-Atlantic region rose to 12.5 in June, rebounding from minus 5.2 in the prior month, according to the Philadelphia Federal Reserve Bank, trumping expectations for a reading of minus 2. Any reading above zero indicates expansion in the region's manufacturing.

And a gauge of future economic activity touched its highest level in nearly five years in May, according to the Conference Board.

But traders shrugged off the positive reports.

Meanwhile, jobless claims jumped 18,000 to a seasonally adjusted 354,000 last week, according to the Labor Department. Economists polled by Reuters had expected a reading of 340,000 last week. The four-week moving average for new claims rose 2,500 to 348,250.