Financial stocks, which led the post-election decline, regained some ground. Bank of America(BAC) shares rose 2%, making the stock the best performer on the Dow.
Apple(AAPL) shares fell deeper into bear market territory -- down more than 20% from their all-time-high of $705 hit in mid-September. The widely-held stock weighs heavily on the Nasdaq and S&P 500.
Following President Obama's re-election Tuesday night, attention has shifted to how lawmakers will address the looming fiscal cliff that threatens to throw the country back into a recession.
Investors remain focused on the debate in Washington over billions of dollars in taxes and spending cuts that are set to kick in automatically on Jan. 1, said Peter Cardillo, market strategist at Rockwell Global Capital. While he expects Obama and Congress to hammer out a solution before the deadline, "it's going to be touch and go for the market in the short run."
Stocks were up modestly in the morning, but selling quickly took over. There was no particular driver behind the afternoon retreat, said Dan Greenhaus, market strategist at broker-dealer BTIG. The fiscal cliff, he added, "is the only thing that matters."
The trade deficit for September narrowed to $41.5 billion. Analysts were expecting the gap to widen to $45.4 billion.
Thursday's data "bodes well for an acceleration of economic activity," said Cardillo.
After the market closed, online travel company Kayak(KYAK) announced plans to be acquired by Priceline(PCLN) for $40 a share in cash and stock.
Shares of Groupon(GRPN) fell 13% in extended trading after the daily deals website reported a net loss for the quarter.
Disney(DIS) reported quarterly and full-year earnings that matched analysts' expectations.
BlackBerry beats Apple! Really.
Before the market opened, Wendy's(WEN) reported weaker-than-expected earnings for the third quarter. But the fast-food chain said same-store sales, a key measure of growth, increased for a sixth quarter in a row, sending shares up 2.5%. McDonald's (MCD)shares fell after the fast food chain said same-store sales declined 1.8% in October.
Dean Foods(DF) shares rose after the company posted a strong profit and said its CFO Shaun Mara is stepping down. Mara will be replaced by Chris Bellairs, who is currently CFO of the company's Fresh Dairy Direct division.
World Markets: While Europe's debt crisis drags on, investors can breathe a small sigh of relief after the Greek parliament approved a new round of spending cuts that are required for the country to receive the next installment of its international bailout.
Despite rising unemployment and declining business confidence in the euro area, the European Central Bank held its main interest rate steady at 0.75%.
The Bank of England left its interest rate unchanged and kept its asset purchase program at £375 billion.
European stocks ended lower. Britain's FTSE 100 fell 0.3% and the DAX in Germany declined 0.4% and France's CAC 40 lost nearly 0.1%.
Asian markets closed sharply lower Thursday, playing catch-up with the previous day's retreat in European and U.S. markets. The Shanghai Composite tumbled 1.6%, the Hang Seng in Hong Kong sank 2.4%, and Japan's Nikkei dropped 1.5%.
Currencies and commodities: The dollar gained ground against the euro and the British pound but dipped versus the Japanese yen.
Oil for December delivery rose 65 cents to settle at $85.09 a barrel.
Gold futures for December delivery rose $12 to end the day at $1,726 an ounce.
Bonds: The price on the benchmark 10-year U.S. Treasury rose, with the yield falling to 1.64% from 1.66% on Wednesday.