Stocks declined Thursday as bank stocks took a hit and techs dragged on the Nasdaq. The losses deepened after a weak government bond auction.
"The good news is the market has recovered. It was discounting the end of the world in January and February," David Pearl of Epoch Investment Partners told CNBC. "The problem now is, after a 30 percent rise off the bottom, it's essentially discounting most of a recovery," he explained. (Watch the video.)
The Dow Jones Industrial Average fell 102.43, or 1.2 percent, giving back all of Wednesday's gains. The S&P 500 lost 1.2 percent, and the Nasdaq tumbled 2.4 percent.
Bank stocks declined, including Wells Fargo and Citigroup , after gaining more than 15 percent in the previous session.
Bank of Americawas the sector's lone holdout: The stock ended up 6.5 percent.
Bernanke said increasing the effectiveness of bank supervisionis a "top priority" for the Fed. Treasury Secretary Tim Geithner sought to ease fear, saying that none of the banks being tested face the risk of insolvency.
CNBC-parent General Electric gained 2.1 percent after CEO Jeff Immelt said the conglomerate's struggling finance arm is doing better than expected. Barclays raised the price target on GE to $15 from $10 and raised its rating to "overweight."
General Motors shares fell 3.6 percent after the troubled automaker reported a net loss of $9.78 a share but beat analysts' target. GM burned through $10 billion of cash in the previous quarter.
Weak demand for a government debt auction also rattled the market, deepening losses, as investors worried that it could make lending more expensive and crimp the nascent recovery.
"The auction is big news because now it's showing that maybe the Chinese don't want our bonds. If the cost of capital for the United States becomes more expensive, then the recession is going to take that much longer to get out of," said Joe Saluzzi, co-manager of trading at Themis Trading, told Reuters.
In economic news, initial jobless claims fell more than expected, to their lowest level since January. Continuing claims, however, hit another record.
This came after a pair of reports Wednesday — from ADP and Challenger, Gray & Christmas — showed the pace of layoffs is beginning to slow.
The Labor Department's April jobs number is due out on Friday. Economists expect it to show that 600,000 jobs were shaved from nonfarm payrolls and that the unemployment rate jumped to 8.9 percent from March's 8.5 percent, according to Reuters.
Technology stocks retreated as as investors backed off the sector which has been leading the current rally.
SiriusXM was the biggest percent decliner on the Nasdaq 100, down more than 18 percent, after the satellite-radio company posted a quarterly loss but raised its outlook.
Chips and telecoms were also among the big drags on Nasdaq. Applied Materials , KLA Tencor and Xilinx all lost more than 6 percent.
AT&T and Verizon fell 4.7 percent and 2.9 percent, respectively, after JPMorgan cut its rating on the stocks to "neutral" from "overweight."
April same-store sales came in better than expected, as warm weather and glimmers of hope for the economy put investors more in the mood to spend.
Wal-Mart reported its same-store sales rose 5 percent, surpassing the 2.9 percent expected, but cautioned that the second quarter will be challenging compared with a year ago, when government stimulus checks were handed out. It shares ended up 0.8 percent.
Gap sales dropped 4 percent but that was nearly half the 7.8 percent decline expected. And Children's Place hopped to a 5-percent gain when analysts had expected sales to be flat.
Shares of AIG shot up more than 10 percent ahead of earnings from the insurer, due out after the closing bell. AIG is expected to post a 5 cent per-share loss.
Still to Come:
THURSDAY: Stress-test results at 5pm ET; Earnings from AIG, CBS, Nvidia after the bell
FRIDAY: Jobs report; wholesale trade; Earnings from Toyota, Berkshire Hathaway
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