The steep drop ended a very long period of calm for the markets, which had been hovering near all-time highs.
Financial stocks, which had soared in the months since the election, declined the most as bond yields fell sharply. Bonds, utilities and gold rose as traders shunned riskier assets. The dollar fell.
The Standard & Poor’s 500 index had its biggest drop since September, sliding 43.64 points, or 1.8 percent, to 2,357.03. The Dow lost 372.82 points, or 1.8 percent, to 20,606.93. The Nasdaq composite index, coming off setting two consecutive record highs, gave up 158.63 points, or 2.6 percent, to 6,011.24.
Small-company stocks fell more than the rest of the market. The Russell 2000 index sank 38.79 points, or 2.8 percent, to 1,355.89. Those companies would stand to benefit even more than large ones from corporate tax cuts President Trump is proposing.
The sell-off snapped a long period of calm after hitting a series of record highs. On Tuesday the S&P 500, the benchmark favored by professional investors, marked its 15th straight day of moving up or down by less than 0.5 percent. It closed at its latest record high on Monday.
All told, the S&P 500 is still up 10.2 percent since the election last November, while the Dow is up 12.4 percent.
Bond prices rose sharply. The 10-year Treasury yield fell to 2.21 percent from 2.33 percent Tuesday.
The headlines ratcheted up the market’s unease. The VIX index, a measure of how much volatility investors expect in stocks, rose to its highest level since April 13. Investors shifted into U.S. government bonds, pushing yields lower, and into gold. The precious metal jumped 1.8 percent, climbing $22.30 to settle at $1,258.70 per ounce.
Among the hardest-hit stocks were in sectors that benefited most from the post-election rally as investors banked on Mr. Trump to cut taxes, boost infrastructure spending and relax regulations that affect energy, finance and other businesses.
Banks fell sharply as bond yields declined, which will mean lower interest rates on loans. Bank of America slid $1.42, or 5.9 percent, to $22.57.
Unease over the potential implications of the latest political fallout in Washington also weighed on the dollar. The euro strengthened to $1.1150 from $1.1095. The dollar dropped to 111.11 yen from 113.03 yen.
Benchmark U.S. crude rose 41 cents, or 0.8 percent, to close at $49.07 per barrel in New York. Brent crude, used to price international oils, gained 56 cents, or 1.1 percent, to close at $52.21 per barrel in London. In other futures trading, natural gas fell 4 cents to $3.19 per 1,000 cubic feet. Wholesale gasoline was little changed at $1.60 per gallon. Heating oil rose 2 cents to $1.53 per gallon.
Among other commodities, silver added 16 cents to $16.85 per ounce. Copper was little changed at $2.54 per pound.
Markets overseas were also mostly lower.
In Europe, Germany’s DAX fell 1.4 percent. The CAC 40 in France slid 1.6 percent. The FTSE 100 index of leading British shares dipped 0.2 percent. Asian markets mostly fell. Japan’s Nikkei 225 dropped 0.5 percent, while South Korea’s Kospi dipped 0.1 percent.