Stocks closed sharply lower on Tuesday as new fears about the U.S. election weighed on the broader market, while crude prices fell amid a strong dollar and Treasury yields rose.
Some analysts said the high-profile sparring between Republican Donald Trump and House Speaker Paul Ryan was fueling concerns that more Republican seats could be lost in the House of Representatives and that there could even be a Democratic sweep in Congress. As a result, health care and biotechnology stocks, which were already under pressure, took a major hit.
"I would say it is a three-pronged sell-off: strong dollar, higher rates, and a Dem sweep," said John Spallanzani, chief macro strategist at GFI Group. "Biotechs and heath care are down the most on fears of a Democratic sweep."
An NBC/Wall Street Journal poll released Monday showed Democrats were the preferred party to lead Congress, while another poll released Tuesday showed Hillary Clinton held a 9 point lead over Trump.
"When you look at Sunday's debate, both candidates were talking about lowering health care costs," said Chuck Self, CIO of iSectors. "There might be some selling pressure from that."
The S&P fell about 1.25 percent, and broke below its 100-day moving average of 2,138.53, with health care shedding 2.5 percent and financials among the worst-performing sectors.
The Nasdaq dropped approximately 1.5 percent, with the iShares Nasdaq Biotechnology ETF (IBB) dropping about 3.8 percent. The IBB was led lower by Illumina, which saw its shares plunge 24.8 percent after the firm slashed its revenue guidance.
Illumina shares in past month
The Dow Jones industrial average fell 267.08 at session lows before closing about 200 points lower, with UnitedHealth, Goldman Sachs and IBM contributing the most losses.
"You've got a rise in Treasury yields; you've got oil prices falling," said Robert Pavlik, chief market strategist at Boston Private Wealth. "You put that together with the dollar rising and Alcoa falling after earnings, and you get a sell-off."
"This is a very short-term focused market. I don't think anything has really changed from yesterday," he said. "This is a very crazy environment because people are just so unsure of what they want to do."
The U.S. dollar rose 0.74 percent against a basket of currencies, hitting its highest level since July 27, as bets that the Federal Reserve would raise rates in December poured in. The British pound was among the biggest laggards against the U.S. currency, falling about 2 percent.
Treasury yields, meanwhile, also rose, with the two-year note yield near 0.86 percent and the benchmark 10-year note yield around 1.76 percent. The benchmark yield also hit its highest level since June 3, before the Brexit vote.
"There have been a few developments that have been pretty risk averse that seem to be bubbling up," said Gene Tannuzzo, portfolio manager at Columbia Threadneedle Investments, including the rising dollar, concerns over the Chinese housing market and central bank tightening.
"There's a concern that central banks, not just the Fed, may be done easing. You put these things together and you get investors taking a step back, given the high valuations," he said.
The Fed kept interest rates unchanged at its September meeting, but strongly hinted that a rate hike may be coming before year's end. Bruce Bittles, chief investment strategist at Baird, said in a Monday note that odds of a December rate hike are 66 percent.
The strong dollar weighed on U.S. crude futures, which fell 1.09 percent to settle at $50.79 per barrel, easing from one-year highs hit during Monday's session as worries that a production cut by OPEC may not be enough to curtail the market's supply glut.
"The [stock] market is looking at oil prices because Putin came out and talked about a supply cut and they want to see if that will actually happen," said Quincy Krosby, market strategist at Prudential Financial.
Oil prices received a boost Monday after Russian President Vladimir Putin said Russia is ready to join a proposed cap on oil output by OPEC members.
"You've got a bit of a pullback in the energy complex," said Art Hogan, chief market strategist at Wunderlich Securities. "I don't think you can point to any specific catalyst, but the pullback in oil and earnings season kicking off with Alcoa missing, on the heels of the Honeywell disappointment, is putting pressure on stocks."
"There just isn't anything good out there to be trading higher on today," said Randy Warren, CIO of Warren Financial. "There isn't any optimism for what's to come from earnings."
Meanwhile, corporate earnings season began on a sour note, with Alcoa reporting weaker-than-expected quarterly results. The firm posted earnings per share of 32 cents and revenues of $5.21 billion. Analysts polled by Reuters expected Alcoa to report profits of 35 cents per share on sales of $5.31 billion. Alcoa shares fell more than 11 percent.
"Although I am not one who is prone to hyperbole, the upcoming deluge of earnings announcements has the potential to drive the direction for equities more than any other reporting season in recent memory," said Jeremy Klein, chief market strategist at FBN Securities, in a morning note.
"The forward multiple for the S&P 500 continues to flirt with 17.0x and hovers just below its peak since the bursting of the Dot Com Bubble. Moreover, profit projections for 2017 reside in the stratosphere and have refused to decline at a pace commensurate to that from the past three years," he said.
Building supplier Fastenal also posted weaker-than-expected results, sending the stock down more than 5 percent. Other companies slated to report this week include CSX, Wells Fargo and JPMorgan Chase.
Minneapolis Fed President Neel Kashkari spoke at Bethel University, saying there is no urgency in raising interest rates. Overnight, Chicago Fed President Charles Evans said he sees benefits in overshooting the Fed's 2 percent inflation target.
There are no major economic data reports due Tuesday, but the Fed is scheduled to release the minutes from its September meeting on Wednesday.
Overseas, European equities traded mostly lower, with the pan-European Stoxx 600 index falling 0.53 percent. In Asia, stocks closed mixed.
Major U.S. Indexes
The Dow Jones industrial average fell 200.38 points, or 1.09, to close at 18,128.66, with Merck leading decliners and Apple the top advancer.
The dropped 26.93 points, or 1.24 percent, to end at 2,136.73, with health care leading all 11 sectors lower.
The Nasdaq shed 81.89 points, or 1.54 percent, to 5,246.79.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 15.4, up more than 14.5 percent.
About nine stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 817.13 million and a composite volume of 3.319 billion at the close.
Gold futures for December delivery fell $4.50 to settle at $1,255.90 per ounce.
—CNBC's John Melloy contributed to this report.
On tap this week:
Wednesday
Earnings: CSX
8 a.m.: New York Fed President Bill Dudley speaks with the Business Council of New York State
9:40 a.m.: Kansas City Fed President Esther George speaks at the Federal Reserve Bank of Chicago Annual Payments Symposium
10 a.m.: JOLTS
2 p.m.: Fed minutes
Thursday
Earnings: Taiwan Semiconductor, Unilever, First Republic Bank, Sky, Marriott Vacations, Winnebago
8:30 a.m.: Jobless claims
8:30 a.m.: Import prices
12:15 p.m.: Philadelphia Fed President Patrick Harker speaks on the economic outlook
2 p.m.: Federal budget
9 p.m.: Minneapolis Fed President Neel Kashkari speaks at a town hall on "Ending too big to fail," the role of the Federal Reserve and other topics
Friday
Earnings: Citigroup, JPMorgan Chase, Wells Fargo, PNC Financial Services, Infosys, Commerce Bancshares
8:30 a.m.: Retail sales
8:30 a.m.: PPI
10 a.m.: Consumer sentiment
10 a.m.: Business inventories
1:30 p.m.: Fed Chair Janet Yellen speaks on "Macroeconomic research after the crisis"
9 p.m.: Minneapolis Fed President Neel Kashkari speaks at a town hall on "Ending too big to fail," the role of the Federal Reserve and other topics
*Planner subject to change. All times Eastern.