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.