Stocks were hit hard for the third straight day on Wednesday, after the ill-chosen words of a European official added to rising anxiety about Japan's nuclear crisis.
Major North American and European indexes fell sharply and investors retreated into typical safe haven investments, highlighting the uncertainty among investors five days after the massive earthquake and tsunami struck Japan.
"The average person is not a nuclear physicist," said Joshua Brown, a New York City-based financial adviser at Fusion Analytics. "We're getting these sporadic bursts of intel, coming at us in kind of a staccato rhythm. Anyone can try to get their heads around what it is, but I think most people have opted instead to just step aside."
The S&P 500 fell 24.99 points or 2 per cent to 1256.88, bringing its three-day decline to 3.6 per cent and wiping out all of the index's gains in 2011. In Europe, Germany's DAX index fell 2 per cent and Britain's FTSE 100 fell 1.7 per cent.
North American stocks began the day looking stable, following a 5.7-per-cent rebound in Japan's Nikkei 225 in overnight trading, which hinted that the worst of the recent bout of volatility was over.
However, the relative calm gave way in mid-morning trading after investors learned that the European Union's commissioner for energy told a European Parliament committee that one of Japan's nuclear plants is "effectively out of control," provoking what could be a "major disaster."
While those comments were later tempered, they rattled the already-frayed nerves of investors who simply can't digest the enormous implications of the devastation in Japan.
"Markets are speculating about a lot of things," said Tommy Nguyen, senior portfolio manager at Palos Management in Montreal. "And the minute they read something that is negative, in terms of nuclear facilities in Japan, the market sells off."
The Chicago Board Options Exchange Volatility Index, or VIX, shot up to an eight-month high of 29 after taking a rather calm view of the market downturn earlier in the week. The index, widely seen as a fear gauge, tends to rise when expectations for the market are declining.
Meanwhile, investors ran to the U.S. dollar and U.S. Treasury bonds as they retreated to the standard safe havens. The yield on the 10-year government bond fell to 3.2 per cent as prices rose, marking its lowest yield since early December.
While some economists have noted that reconstruction efforts can lift economic activity in Japan over the longer term, the enormity of last week's massive earthquake and tsunami, along with growing concerns about the fate of Japan's damaged nuclear power plants, could shake that view.
"Fear of radiation could hamper not just immediate relief efforts, but could profoundly influence all kinds of spending patterns, which I could easily see exerting big effects on demand in addition to the obvious considerations on the supply side," wrote James Hamilton, professor of economics at the University of California in San Diego, in a blog post.
"To paraphrase Franklin Roosevelt, the fear itself could cause more economic damage than the physical events themselves, and the physical damage was of course itself quite awesome and frightening."
Canada's benchmark index was spared the worst of the equities selloff, as rising crude oil, gold and other commodities offset declines elsewhere. The S&P/TSX composite index closed at 13,524.82, down 22.14 points or 0.2 per cent.
The market backdrop beyond Japan is hardly uplifting: Violent political unrest continues in the Middle East and North Africa, while the European debt crisis persists. On Wednesday, Moody's Investors Service downgraded Portugal's credit rating.
Still, the dips in major market indexes outside of Japan remain fairly tame so far. Last year, the S&P 500 fell 16 per cent as investors fretted about the European debt crisis.
But with no end in sight to the crisis in Japan, the market's downturn could have further to go.