Investors fled stocks and rushed into the safety of US government bonds, although the market recouped some of the heavy early losses near the end of trade.
At the closing bell, the Dow Jones Industrial Average tumbled 249 points, or 1.6 per cent, to 15,767.
The S&P 500 fell 1.2 per cent and the Nasdaq Composite edged down 0.1 per cent.
Treasury prices jumped, pushing the yield on the 10-year note down to 1.947 per cent from 2.038 per cent on Tuesday.
Stock losses reached over 3 per cent at one stage as oil prices plumbed new multi-year lows. US crude oil dropped 6.7 per cent to $US26.55 a barrel at the close of trade.
“It’s a big move, and the sentiment in crude is driving pretty much all asset classes right now,” Brett Mock, managing director at brokerage JonesTrading Institutional Services, said.
The slump in oil prices dragged shares of energy companies sharply lower. The S&P 500’s energy sector tumbled 3 per cent, and Chevron was the biggest decliner in the Dow industrials.
The iShares iBoxx $US High Yield Corporate Bond exchange-traded fund, the largest junk-bond ETF by assets, declined 2 per cent. The ETF includes debt of some energy companies. Commodity-linked currencies dropped, with Russia’s ruble hitting multi-year lows.
The months-long drop in oil prices and renewed uncertainty about the magnitude of the slowdown in China, the world’s second-largest economy, have dragged stocks sharply lower this year. The Dow has tumbled more than 10 per cent so far in 2016.
While many investors still expect the US economy to expand this year, they’re increasingly watching for signs that a slowdown abroad could dampen growth in the US.
“What we’ve been hanging our hat on is that the US doesn’t look like its going into recession,” Ben Pace, chief investment officer at HPM Partners, said.
Mr Pace said he’s closely monitoring developments in the labour market, especially in hard-hit sectors like energy, and updates on consumer spending, which drives the US economy.
“Whenever you have markets go down like this you’re testing those convictions,” he said, referring to his view on US growth.
The US consumer price index slipped 0.1 per cent in December, the Labor Department said Wednesday. Excluding the volatile food and energy categories, so-called core prices rose 0.1 per cent, their smallest increase since August. Economists surveyed by The Wall Street Journal had expected overall prices to stay flat and core prices to rise 0.2 per cent.
Separately, the Commerce Department said housing starts fell 2.5 per cent in December from a month earlier to an annual rate of 1.149 million, a sign the housing market lost momentum at the end of 2015. Economists had expected December housing starts to reach a rate of 1.20 million.
The International Energy Agency said Tuesday that oil prices would likely slide further this year as the market adjusts to the extra oil from producers such as Iran.
“If the oil price was just a supply story...it wouldn’t bother everyone” Peter Schaffrik, chief European macro strategist at RBC Capital Markets, said, noting additional concerns about waning demand for commodities from China and pressure on oil producers. China, Brazil and Russia, are not doing well, he said, and “that has ramifications for other markets as well.”
Continued downward pressure on oil prices has hit equities hard in recent weeks. Many investors believe stock markets will remain volatile until oil prices find a floor, as pockets of the energy sector increasingly face the prospect of bankruptcies, and economies that depend on natural resources come under pressure.
This year’s rallies have struggled to gain traction as volatility in oil prices keeps buyers on edge.