Stocks closed lower for the second straight session after the latest productivity data renewed inflation concerns and a rate hike in Europe fueled jitters about rising interest rates.
"I think what we're seeing here is a correction after a fantastic run," said Larry Kantor, co-head of research at Barclays Capital. "It really reflects the pricing out of Fed rate cuts. With the economy accelerating now, that's out of the question and I think the market's readjusting to that."
The Dow Jones Industrial Average fell more than 150 points intraday before ending down nearly 130 points, its biggest one-day drop since May 10.
IBM and Dupont were the biggest percentage losers on the Dow, declining more than 2%.
"It's off to the races on the selloff," Robert Pavlik, chief investment officer at Oaktree Asset Management, told CNBC.com. "There's concern about growth, the rate cut being off the table and 5% yield on the 10-year note. It's all leading to some profit-taking and people trying to rush out the door at the same time. I think it's an overreaction."
Selling was across the board, with all of the S&P 500 sectors in the red. The interest rate sensitive utilities sector was among the selloff leaders for most of the session. Transports and other cyclical stocks also suffered. Declining shares outpaced advancers on the New York Stock Exchange by about four to one.
Economic data, a rate hike in Europe and Fed official comments all weighed on the markets.
The Labor Department said productivity slowed sharply in the first quarter to an annual rate of 1%, revised down from 1.7% reported a month ago. That was in line with expectations. However, the data also showed that unit labor costs--a key gauge of inflationary pressures-- was revised higher to 1.8% annualized from 0.6% earlier.
"If you have rising input costs and rising interest rates, although the P/E multiple may be cheap, it's hard to expand those multiples in that environment," said Kevin Ferry, chief market strategist, at Cronus Futures Management. "So I think you're just seeing a logical correction from a strong run."
Fed speak today didn't help matters. During a speech in Frederick, Maryland, Richmond Fed President Jeffrey Lacker said he is seeing no significant moderation in U.S. inflation yet. He also said it's difficult to gauge whether the housing market has reached bottom.
"The U.S. capital markets are a little bit frustrating right now for investors," said Peter Andersen, portfolio manager at Dreman Value Management. "I think what you're seeing is the classic summer camp tug of war between inflation and the housing selloff and each has different implications for interest rates."
Investors were keeping a close eye on interest rates here in the U.S. after the European Central Bank raised its core interest rate to 4%.
"With the 10-year Treasury near 5%, there's clearly upward pressure on interest rates," said David Reilly, director of portfolio strategy at Rydex Investments. "But we don't think we're at the point yet where the cost of financing starts to derail this massive liquidity-driven rally that we've seen for quite some time now."
Treasury prices edged higher, sending yields lower.
New York light sweet crude futures initially fell after the government reported a rise in oil inventories last week of 100,000 barrels. However, crude oil reversed course after reports that Turkish troops had crossed into northern Iraq to chase Kurdish guerillas. Gasoline supplies showed a build of 3.5 million barrels, much more than expected, and refinery utilization declined by 1.5% to 89.6.
European Stocks Drop
European stock markets closed lower Wednesday after the ECB hiked interest rates and Morgan Stanley called time on the current bull market.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX all posted solid losses.
The European Central Bank hiked its core interest rate to 4% from 3.75%. Of the 83 economists polled by Reuters, not one expected the central bank to keep rates on hold, an indication of how well the ECB is telegraphing its moves.
Meanwhile, European stocks got a shot across the bow as Morgan Stanley predicted a 14% correction in the MSCI index of 600 European and British shares over the next six months and issued a "Triple Sell" equity warning, the first since the dot-com bust, citing high price-to-earnings ratios and a continued anticipation of global liquidity.
Asian Stocks Mixed
Tokyo's Nikkei 225 Average closed flat as investors sold Advantest and other recent gainers, but Marubeni surged on news of its plan to invest in the United Arab Emirates and a broker's upgrade, helping the benchmark remain above 18,000. Goodwill Group, which offers nursing care services, ended down 12.2% on news the government will not renew Goodwill licenses.
In Australia, the S&P/ASX 200 Index finished lower after strong domestic first-quarter economic growth data raised the risk of an interest rate rise later this year, with rate-sensitive banking stocks leading the decline.
Chinese stocks see-sawed throughout the session, but relative calm returned in the afternoon with the market edging higher. The Shanghai Composite Index fell as much as 2.26% in early trade but clawed back into the black, extending Tuesday's 2.63% gain. Chinese markets have fallen more than 10% from a record high since authorities hiked a stock-trading tax a week ago to cool a market that had almost tripled in value over the past year.