Stocks kicked off May with a big thud, with major averages dropping nearly 1 percent across the board, as a batch of weaker-than-expected economic data overshadowed the Federal Reserve's plan to maintain its stimulus program.
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"I don't think there's any new information in this announcement–in fact, I'd have been surprised if the Fed had done something different," said John Fox, co-manager of the FAM Value Fund. "It's clear that [Bernanke's] focused on the unemployment rate and given last month's jobs report and today's ADP data, I wouldn't expect any change in what they're doing."
The Dow Jones Industrial Average tumbled 138.85 points, or 0.94 percent, to end at 14,700.95, dragged by Merck and Verizon.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped above 14.
All key S&P sectors finished in the red, led by energy and materials.
With the day's declines, major averages wiped out nearly half of April's gains. Stocks posted robust gains of more than 1.5 percent across the board in April. Interestingly, stocks have not posted gains in May since 2009.
The Federal Reserve kept interest rates unchanged, as expected, and reiterated it will continue asset purchases until the labor market improves substantially.
One minor change in the Fed's recent statement after the meeting—that the central bank would increase or decrease the pace of its asset purchases depending on conditions.
"The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes," according to the statement.
"The stock market has benefited from the monetary policy as the Fed's actions have encouraged risk taking," said Tanweer Akram, senior economist at ING U.S. Investment Management. "But at the end of the day, you have to have real income growth for nominal GDP growth."
On the economic front, growth in manufacturing activity slowed in April, according to the Institute of Supply Management. And construction spending declined in March to a seven-month low, according to the Commerce Department.
Adding to woes, the U.S. private sector added an unimpressive 119,000 jobs in April, according to the ADP National Employment Report, well below economists' expectations for an increase of 150,000 jobs. It was the smallest gain since last September. The ADP report came ahead of the government's widely-watched monthly employment report, which is expected to show 150,000 new non-farm jobs were added in April, according to an estimate from Reuters.
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Also on the economic front, U.S. manufacturing growth slipped in April to the lowest final reading in six months, according to financial data from Markit.
"The U.S. economy is expanding, but the pace is quite tepid," said Akram. "There were talks of reining in the QE program, but we don't think that's going to be the case, given the state of the data. Our view is that the Fed will continue its asset purchases at the same scale at least until the end of this year, if not beyond, as inflation is low and unemployment remains high."
"There is some good news—housing is improving," noted Akram. "But unless the labor market strengthens and disposable income grows, the prospect for the economy is weak."
Among earnings, Comcast gained after the cable television provider posted higher quarterly earnings, thanks to strength on the cable side of its business. Comcast is the parent company of NBCUniversal.
MasterCard reported earnings that beat Wall Street's expectations, but shares of the credit card company edged lower after its CEO maintained a cautious outlook for the full year and said the second quarter quarter looks "dodgy" in the U.S.
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To date, nearly 70 percent of S&P 500 companies have posted quarterly results, with 69 percent of firms topping earnings expectations, according to Reuters. If all remaining companies post results inline with estimates, earnings will be up 4.5 percent on first quarter 2012.
But only 43 percent of companies have beaten revenue forecasts. On average, sales have come in 1 percent below estimates.
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Apple slipped, pulling back from the previous session's rally after the iPhone maker launched a $17 billion bond offering, the largest corporate-bond deal in history as part of a plan to return $100 billion to shareholders by the end of 2015.
Meanwhile, the European Central Bank meets on Thursday, and is widely expected to cut interest rates to give the frail euro zone economy a boost. Most European markets are closed on Wednesday for the May Day public holiday, but London-listed stocks are trading.
"The stock-pickers market will be tested over the coming days. It certainly feels like there is a 'calm before the storm' effect at the moment," wrote Evan Lucas, market strategist at IG, in a note."Macro data has to start showing signs of stabilizing, or central banks have to respond to the data being printed. Without this, a correction is on."
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Weekly mortgage applications gained last week, lifted by demand for refinancings as interest rates slid, according to the Mortgage Bankers Association.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter:
Coming Up This Week:
THURSDAY: Challenger job-cut report, ECB announcement, international trade, jobless claims, productivity & costs, natural gas inventories, Fed balance sheet/money supply, DirecTV shareholder mtg, UBS shareholder mtg, UPS shareholder mtg, Verizon shareholder mtg; Earnings from GM, Royal Dutch Shell, Sanofi, Kellogg, Beazer Homes, AIG, Gilead Sciences, Kraft Foods
FRIDAY: Nonfarm payrolls, factory orders, ISM non-mfg index, AOL shareholder mtg, Blackstone analyst mtg; Earnings from Berkshire Hathaway
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