Economic data showing an unexpectedly large fall in in wholesalers' inventories added to the bearish sentiment.
The drop in inventories in June, which was nearly double expectations, suggests that businesses remained skeptical about a return in demand. For details see: [ID:nN11520426]
Financial stocks, which had gained about 25 percent in the last month, tumbled after Rochdale Securities analyst Richard Bove painted a gloomy outlook for the banking industry. He said bank stocks are trading on "fumes," and he expects a short-term pull-back in their stock prices. For details, see [ID:nBNG503348].
Among banking stocks, Bank of America(BAC.N) was down 4.8 percent to $15.88 and JPMorgan Chase (JPM.N) was down 3 percent to $41.40.
"Bank (shares) have been rallying because low interest rates have helped them make money," said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California. "But the deleveraging process is removing tens of billions from the economy. We're going to see a lot more defaults."
A report from the Congressional Oversight Panel, a U.S. bailout watchdog, issued late Monday highlighted the rocky road facing the banking industry. The panel said toxic loans and securities continue to pose a threat to the financial system, particularly for smaller banks that face mounting losses on commercial real estate loans.
The Dow Jones industrial average .DJI was down 98.85 points, or 1 percent, at 9,239.10. The Standard & Poor's 500 Index .SPX slid 13.65 points, or 1.4 percent, at 993.45. The Nasdaq Composite Index .IXIC fell 28.08 points, or 1.4 percent, at 1,964.16.
Springer said there is "a little pullback" after the recent rally that sent the broader S&P index to a 10-month high last week and up nearly 50 percent from a closing low set on March 9.
Stocks slightly pared losses after results from a government auction of U.S. Treasuries at midday.
Investors were
also cautious ahead of a two-day
monetary policy meeting by the U.S
Federal Reserve that kicks off
Tuesday afternoon and July retail
sales data due Thursday.
With quarterly earnings reports also
due this week from retail giants
Wal-Mart (WMT.N), J.C. Penney (JCP.N)
and Macy's (M.N), investors will
look to see if consumer spending,
which accounts for roughly
two-thirds of the U.S. economy, is
stabilizing.
Another worrying sign of a
still-weak economy came from hedge
fund firm Atticus Capital LLC, which
told investors that it is closing
two of its three funds and would
return $3 billion to shareholders.
For details, [ID:nN11329389]
The financial sector of the S&P 500
.GSPF dropped 3.3 percent. The S&P
Regional Banks sub-index .GSPBNKS
was off 4.4 percent, while the KBW
Bank Index .BKX was down 4.5
percent.
Adding to losses for financials,
Miller Tabak cut its price targets
on Zions Bancorp (ZION.O) and
Regions Financial Corp (RF.N).
Shares of Zions dropped 9.8 percent
to $16.17, while Regions dropped
4.43 percent to $4.75.
The negative news offset
better-than-expected data on U.S.
non-farm productivity in the second
quarter, which showed worker
productivity rose at the fastest
pace in six years as hours worked
fell much more steeply than output.
(Editing by Leslie Adler)