Stocks closed lower as fears that inflation was hampering holiday gift-buying combined with wider concerns about the state of the economy.
A downgrade for blue-chip construction manufacturer Caterpillar paced a market continuing its slide downward despite hopes that a Santa Claus rally would rescue Wall Street from its late-year doldrums.
Major indexes all sagged through the day, with the S&P 500 dropping more than 1 percent on concerns that the housing slump was having a harsher effect on the economy deepened. Meanwhile, the Nasdaq fell nearly 2 percent and the Dow was off 1.2 percent late in the session.
"There seems to be a fair amount of discussion about holiday sales being weaker; that seems to me what is causing a bit of a drag on the market," said Peter Jankovskis, director of research at OakBrook Investments in Lisle, Ill. "It shouldn't be much of a surprise because many of the retailers were warning about the potential for weaker sales."
Polls of shoppers, including the CNBC Holiday Central Survey, found that consumers are expecting to spend more than they did last year but less than originally expressed on earlier surveys. But while retail stocks did well, investors worried that consumers would spend less money elsewhere, leading a broad, sustained sell-off.
Retailers rebounded in late-morning trading, with gains posted at JC Penney , Kohl's, Costco and Target.
M&A Heats Up
Merger and acquisition activity continued despite the gloom, with diversified manufacturer Ingersoll-Randannouncing it would buyTrane , an indoor heating systems maker, for about $10.1 billion in cash and stock, to expand its climate control business. IR was among the biggest losers of industrial stocks.
And Aon, one of the world's largest insurance brokers, said it would sell two units for about $2.75 billion and will devote the proceeds of the deal to a share buyback.
The company said it sold its Combined Insurance unit to ACE for $2.4 billion in cash and its Sterling Life Insurance unit to Munich Re, for $352 million.
But National City, the ninth-largest U.S. bank, saw its shares rise after it said it is reserving $700 million for fourth-quarter loan losses, but indicated the worst may be over. The market has generally rewarded financials with exposure to subprime losses who have been open about the extent of the losses.
It was a mixed bag overall for financials, with Citigroup posting gains and JP Morgan Chase dropping, while other major players in the sector were unchanged with an hour left in the trading day.
Also today, the Federal Reserve is auctioning $20 billion worth of loans. The aim of the Temporary Auction Facility is to get world credit markets working normally again. The Fed announced the move last week after a quarter-point rate cut was greeted with disdain.
International Business Machines served as the second-biggest drag on the Dow, while the tech-heavy Nasdaq was hit by drops at Research in Motion and Apple.