U.S. stocks closed sharply lower Thursday, near to their 52-week lows, with investors rattled after the Federal Reserve’s interest-rate policy and fresh concerns of a partial government shutdown undercut buying appetite.

The Dow Jones Industrial Average DJIA, +0.19% fell 464.06 points, or 2% to 22,859.60, while the S&P 500 index SPX, +0.29% fell 39.54 points, or 1.6% to 2,467.42. The Nasdaq Composite Index COMP, +0.36% fell 108.42 points to 6,528.41, a 1.6% decline.

The session saw the Nasdaq dipping in and out of bear-market territory, defined as a 20% decline from its most recent highs. The Nasdaq closed roughly 0.6% above this critical level, while the S&P closed 15.8% from its most recent highs and the Dow down 14.8% from its early-October peak.

What drove the market?

With the next earnings season still three weeks away, investors remained focused on macro headwinds, with the Fed’s decision to raise interest rates still at the fore of traders minds and rising chances of a partial government shutdown compounding their dour mood.

Thursday’s selloff continued the bloodletting seen Wednesday, after the Fed hiked the federal-funds rate by 25 basis points to a range of 2.25% to 2.5%, its fourth interest-rate hike of the year. Losses accelerated as Fed Chairman Jerome Powell explained the decision and accompanying forecasts.

Even though the Fed indicated Wednesday that it sees just two rate hikes in 2019, down from the three predicted in September, investors clearly hoped for even more dovish reassurances from the central bank than they were given.

Of particular concern was Powell’s discussion of the Fed’s quantitative tightening program, which is now removing $50 billion of federal government debt and mortgage bonds from the central bank’s balance sheet. That is just $21 billion less a month than the Fed added to the balance sheet, on average, during its stimulative quantitative-easing program that spanned the post-financial crisis recovery.

Powell reiterated in his news conference that balance-sheet reduction would remain on “autopilot,” suggesting that even if the U.S. economy deteriorates significantly, as many market participants are predicting will happen next year, financial conditions will nevertheless become tighter month-by-month.

This program of “quantitative tightening” is set to drain $600 billion in liquidity from markets in 2019. By allowing these bonds to roll off its balance sheet, the Fed is pushing long-term interest rates higher, and if the program remains on this fixed path that could more than offset the stimulative effects of any Fed decision to raise interest rates twice or less in 2019, as the FOMC now predicts.

Meanwhile, fears over a potential partial government shutdown intensified after reports that President Donald Trump told House Republicans he would refuse to sign an appropriations bill passed by the Senate that would avert a shutdown, unless both houses of Congress agree to appropriate $5 billion in extra funds for expansion of the U.S. southern border wall.

Though shutdowns haven’t typically done much damage to stock markets, they can be more harmful the longer they last, and investors may have been caught off guard by the news, after it was widely reported as late as Wednesday night that a deal to avert the shutdown had been reached.

What data are in focus?

The number of Americans newly applying for jobless benefits rose in the seven days ended Dec. 15 by 8,000 to 214,000, less than the 218,000 economists that polled by MarketWatch had predicted.

The Federal Reserve Bank of Philadelphia released the results of its monthly regional survey of manufacturers, with the index showing a reading of 9.4, down from 12.9 in November and below economists’ expectations of a 14 reading.

The Conference Board’s leading economic index rose 0.2% in November, but pointed to slower growth in the second half of 2019.

What are the analysts saying?

Michael Arone, chief investment strategist at State Street Global Advisors, argued in a Thursday research note that while “markets have survived past government shutdowns and will survive this potential partial shutdown, too,” the “ugly and exhausting” standoff that gathered steam Thursday “is an early is an early indication of what to expect from our leaders in Congress in 2019 and sets the tenor for the national election in 2020,” he wrote.

Arone went on to argue that “bipartisan bickering is raising larger concerns for investors about whether a divided government can handle more important issues,” and that this caution helped fuel Thursday’s weakness. “Call it the discord discount,” Arone wrote.

“The drawdown in stocks is directly related to generally tighter financial conditions,” Talley Léger, equity strategist at Oppenheimer Funds, told MarketWatch. “Yes, that means the Fed raising rates, but also a much stronger dollar and widening credit spreads.”

The other factor weighing on equities Thursday and in recent weeks, Léger said, is the fact that U.S. equities are still expensive relative to emerging-market stocks, even as the S&P 500 has lost close to 16% of its value over the past three months.

“Investors are taking their profits on U.S. equities, selling the rallies and rotating into segments and regions that are much more undervalued,” Léger said, arguing that China looks particularly attractive, given that the Chinese currency, the renminbi, has weakened to three-year lows against the dollar, and because the government is lowering rates and bank reserve ratios, while “fiscal stimulus [in China] is just coming online.”

“Investors have lost all hope as Powell was really the last opportunity in ’18 that could possibly trigger an uptick in willingness to put risk back on,” wrote Joel Kulina, an analyst with Wedbush Securities, in a Thursday-morning research note.

“The market has been in a slow-motion car crash, there’s just nowhere to hide. To the extent anyone had any risk appetite in the final couple of weeks in the year, that is now entirely gone,” he added.

What stocks were in focus?

Shares of Rite Aid Corp. RAD, -17.75% closed 2.9% lower Thursday, even after the company beat earnings expectations in the most recent quarter, and renewed its pharmaceutical purchasing and distribution agreement with McKesson Corp MCK, -0.36% .

Walgreens Boots Alliance Inc. WBA, -0.08% stock fell 5%, after the drugstore chain reported fiscal first-quarter sales that fell short of expectations. The firm also announced a $1 billion cost-cutting plan.

Pier 1 Imports Inc. US:PIR stock was in focus, after the company announced it was considering “ strategic alternatives,” for the firm. It also named a new CEO and announced cost cuts and reduced spending. The stock plunged 57.6% on Thursday.

Shares of BlackBerry Ltd. BB, -1.04% rose 2.7% after the company announced third-quarter profit and sales beats earlier in the morning.

Conagra Brands Inc. CAG, +2.27% shares fell more than 16%, after the company missed Wall Street expectations for its fiscal second-quarter revenue, while issuing a downbeat earnings outlook.

How did the benchmarks trade yesterday?

On Wednesday, the Dow Jones Industrial Average fell 351.98 points, or 1.5%, to 23,323.66, while the S&P 500 index fell 1.5% to 2,506.96. The Nasdaq Composite Index tumbled 2.2% to 6,636.83.

What did other markets do?

Asian stocks closed in the red, with the Nikkei NIK, -1.10% dropping 2.8% and Hong Kong’s Hang Seng Index HSI, -1.81% sliding 0.9%. European stocks SXXP, -1.02% closed lower.

Perceived havens such as the Japanese yen got a boost, with the dollar dropping 0.6% against the yen USDJPY, +0.02% to ¥111.67, with gold US:GCG9 up 0.8% to $1,266.20 an ounce.

Crude-oil prices resumed a selloff after a bounce on Wednesday. February West Texas Intermediate crude US:CLG9 slid $2.02, or 4.2%, to $46.15 a barrel.