NEW YORK — Encouraging signs for the labor market caused alarm on Wall Street as investors sped up a broad sell-off, fueled by worries the Federal Reserve will soon scale back its stimulus.
Major U.S. indexes closed sharply lower Thursday as yet another hopeful sign of a recovering U.S. economy led traders to believe the central bank will begin slowing its morphine drip of easy money as early as next month.
"Investors are waking up to the reality that this is going to be happening, and September is not very far away," said Jack Ablin, chief investment officer at BMO Private Bank.
The Dow Jones industrial average sank 225.47 points, or 1.47%, to 15,112.19, its biggest drop since June, when conflicting Fed signals threw financial markets into a tizzy. The blue-chip index has so far fallen 2.5% this month, and on Thursday was sliding toward a psychological milestone of 15,000.
The broader Standard & Poor's 500 index slumped 24.07 points, or 1.43%, while the technology-heavy Nasdaq composite index slid 63.16 points, or 1.72%.
The number of American workers filing for initial unemployment benefits unexpectedly fell to a nearly six-year low last week — 320,000, a drop of 15,000 from the previous week, the U.S. Labor Department reported.
The decline in first-time jobless claims — to a level not seen since October 2007, before the Great Recession began — indicates employers are increasingly retaining their employees, even if hiring remains mediocre.
In another hopeful sign, labor employment in the state of New York climbed to its highest level in a year, according to the New York Federal Reserve. An index showing the number of manufacturing jobs rose, according to the New York Fed's Empire State Manufacturing Survey.
Investors have kept a close eye on economic data to divine the Fed's next move. The central bank has said any decisions about reducing, or "tapering," its stimulus program would depend on data signaling the U.S. economy can stand on its own.
The problem for investors, however, has been to weigh how much of this year's rapid stock rally has been boosted by the Fed's $85-billion-a-month bond purchases. The central bank's bond purchasing, known as quantitative easing, has pushed down interest rates to make borrowing cheaper and stimulate growth.
But the Fed's buying has made bonds less attractive, pushing investors into riskier assets such as stocks.
"Investors are somewhat confused — they're getting mixed signals," said Alan Whitman, managing director at Morgan Stanley Wealth Management in Pasadena. "You're kind of damned if you do, damned if you don't."
Yields on the benchmark 10-year Treasury bond rose to 2.77% on Thursday from 2.71% the previous day, their highest level in two years, according to Tradeweb.
Despite recent losses in stocks, the Dow was still up more than 15% for the year.
Investors have also been spooked by some corporate news.
Discount giant Wal-Mart Stores Inc. was so pessimistic about the economic outlook for the next few months that it cut both its profit and revenue forecasts for the full year. Its second-quarter results also missed Wall Street expectations. This week, department store chains Kohl's and Macy's also slashed their predictions for the remainder of the year.
Retail sales have been uninspiring, rising 0.2% in July, the U.S. Commerce Department said Tuesday. It was the measure's fourth straight gain, but Wall Street had expected a better performance.
Analysts said the effects of January's payroll tax hikes are starting to filter into consumers' spending patterns, as are the aftershocks of government furloughs, mild employment gains and minimal income growth. Many Americans spent last month making small discretionary purchases instead of jumping for big-tag buys.
"This isn't a robust recovery," Ablin said. "This is probably among the weakest economies that you could justify tapering in."