A see-saw session ended with stocks falling off in the afternoon and landing in bear-market territory by the closing bell.
The Dow Jones Industrial Average and Nasdaq both ended the day on bear turf, down 20 percent from their October highs. The Dow lost 1.5 percent, while the Nasdaq shed 2.3 percent and the S&P 500 index declined 1.8 percent and is now about 10 points away from its bear mark.
Volume was thin as traders had already begun to filter out for the Fourth of July holiday. The stock market will close at 1pm ET Thursday and the bond market at 2pm ET. All U.S. financial markets are closed Friday.
"With the continual drumbeat of bad news and deteriorating values, equity investors are probably three steps short of jumping off a bridge," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
And, while stocks may look cheap right now with the market down 20 percent, Ablin says he thinks there's still another 5 percent to go.
In order to get that last 5 percent to capitulation and better times ahead, analysts need to lower their profit expectations and oil needs to come down, he said.
Earnings season kicks off next Tuesday with a report from Alcoa , which saw its shares take another 7-percent beating. The stock has fallen 28 percent since mid-May.
Stocks got an early bump from a report that showed factory orders rose 0.6 percent in May but sentiment was tarnished by oil's rise after an unexpected draw in crude inventories and a bleak ADP jobs reportahead of tomorrow's jobs report.
Oil prices wavered between $140 and $144 before settling near the high end of that range at $143.57 a barrel.
Private employers in June slashed 79,000 jobs from their payrolls, the largest drop in nearly six years, according to a report from ADP Employer Services. Economists had expected a more mild drop of 20,000 jobs. The May number was revised to show a 25,000-job gain, compared with the previously reported 40,000 increase.
The ADP report is closely watched ahead of the government's monthly payrolls report, due out on Thursday, one day earlier than usual due to the July 4 holiday. Economists largely expect to see a drop of 60,000 jobs.
"Certainly, the consensus suggests a worsening" in the jobs situation, Ablin said. "The good news is -- it's a very low bar," he said. "There's probably a better chance of a positive surprise for stocks."
But some economists warned that, as auto makers dropped a batch of awful sales numberson the market on Tuesday, American workers may be in for more trouble ahead.
General Motors skidded 15 percent, making it the biggest drag on the Dow, after Merrill Lynch said the struggling auto maker is going to need to raise $15 billionto quash liquidity concerns and that a bankruptcy filing is "not impossible." The brokerage cut its rating on GM to "underperform" from "buy" and slashed its price target on the stock to $7. Shares were trading between $11 and $12.
Materials and industrials were some of the day's biggest decliners, off 5.2 percent and 3 percent, respectively, amid concerns about the economy. Energy stocks de-coupled from surging oil prices, falling 3.2 percent.
Financials reversed course and ended the day down 1.4 percent after leading the pack in the prior session.
Only a handful of financials ended higher, including Lehman Brothers , JPMorgan and Goldman Sachs .
Lehman Brothers shot up 6.7 percent after reports that the firm plans to issue stock to its employees in order to retain some of its top talent amid rumors that short sellers are trying to take it down like Bear Stearns.
JPMorgan gained 1.7 percent, making it the top gainer on the Dow.
Financials got a boost from across the pond, when Deutsche Bank, and UBSsaid theywon't need to raise any more capital.
Merrill Lynch skidded 3.4 percent after yet another analyst lowered her estimate.
Oppenheimer analyst Meredith Whitney slashed her second-quarter earnings estimate for Merrill to a loss of $4.21 a share and projected the bank would take $5.8 billion in writedownsfor the quarter. Whitney said she expects the firm to announce plans to raise capital along with its second-quarter report. She also blew out her full-year estimate to a loss of $5.37 a share from her prior estimate of 45 cents a share.
UBS projected Merrill's writedowns for the quarter at $4.5 billion and said Citigroup is likely to face a more severe $8.7 billion in writedowns.
CIT Group fell back about 5 percent after a 30 percent surge in the prior session when the company announced plans to sell its home-lending business.
Meanwhile, Microsoft is preparing a new bid for Yahoo's search business and has approached other media companies about joining it in a deal that would effectively lead to Yahoo's breakup, the Wall Street Journal reported.
Shares of UnitedHealth Group, which have fallen more than 50 percent this year, lost another 2 percent as the nation's largest health insurer slashed its full-year outlook and said it would pay more than $900 to settle options-related litigation.