NEW YORK (CNNMoney) -- The fear trade picked up steam Tuesday, as investors grew increasingly worried about Europe's fiscal health. All three indexes closed down more than 1.5%, marking the fifth straight losing day for stocks.
Early in the day investors, traded out of stocks after reading headlines about rising borrowing costs for Spain and Italy. As the day progressed, investors grew increasingly jittery over the health of the global economy, which caused the sell-off to intensify.
"People are starting to get very concerned about the macro picture of both sovereign debt and China's slowing growth," said Sam Ginzburg, head of trading at First NY. "We're starting to get very worried about going back to a recession."
The Dow Jones Industrial Average (INDU) closed down 214 points, or 1.7%, capping off the worst day since November 2011. The S&P 500 (SPX) lost 24 points, or 1.7%. The Nasdaq (COMP) fell 56 points, or 1.8%. The S&P 500 also had the worst day since November 2011, while Nasdaq posted the worst finish since last December.
Yields on Spain's 10-year bonds hovered just under 6%, the highest level in more than three months. Borrowing costs have been trending higher as the government struggles to push through budget cuts. In Italy, the yields rose near 5.7%.
Peter Boockvar, chief equity strategist at Miller Tabak, said that while U.S. investors had been largely ignoring sovereign debt questions in Europe, the continent's problems cannot be ignored now.
As part of a broad retreat from risky assets, investors jumped into U.S. Treasuries, driving the yield on 10-year Treasuries below 2% for the first time in more than a month.
Twenty-nine of the Dow's 30 components ended in the red, with Bank of America (BAC, Fortune 500) leading the broad retreat. Oil and industrial stocks were also among the biggest decliners. GE (GE, Fortune 500), Caterpillar (CAT, Fortune 500) and Exxon (XOM, Fortune 500) fell more than 1%.
The so-called fear index, the VIX (VIX), rose nearly 11% Tuesday and is up nearly 33% over the past five days. It's at 20.5, still far from 30 -- a reading that typically signals heightened investor fear.
Investors got one positive surprise after the markets closed. Dow component Alcoa (AA, Fortune 500) beat earnings estimates when it reported after the closing bell. Alcoa's earnings unofficially begins the release of first-quarter financial results.
Analysts are forecasting a 0.1% drop in first-quarter earnings for companies in the S&P 500 compared to a year earlier, according to FactSet. While that's not a major decline, it would mark the end of a nine-quarter winning streak. Stocks were on a tear in the first three months of this year, with the Dow and S&P 500 enjoying their best first quarter in over a decade.
"We're essentially expecting no growth, but we could see earnings come in worse than that," said Boockvar. "I think we have the potential for some disappointment."