Stocks fell for a second day Thursday after the Federal Reserve announced plans to start unwinding some stimulus measures and a report showed existing-home sales fell last month.
The market shrugged off solid demand for the seven-year Treasury auction, as well as an earlier report that showed an unexpected drop in jobless claims last week.
The Dow Jones Industrial Average shed 41.11, or 0.4 percent, to close at 9,707.44. The S&P 500 lost 1 percent and Nasdaq fell 1.1 percent — its biggest one-day drop since September.
"I do think we'll eventually reach 10,000but I think it's going to take a while longer than people expect," Peter Costa of Empire Executions said on CNBC. "Right now we're in a consolidation phase ... and it's gonna take time to get through it," he said, adding that he thinks the Dow will reach 10,000 in early October.
Rattling some investors, the Fed said it was scaling back two emergency-lending programs: It's paring its 28-day term-auction facility to $25 billion from $75 billion as well as its 84-day TAF, a program to offer banks access to short-term emergency funds that it's considering eliminating early next year.
"These schedules are consistent with the intention ... to gradually scale back these facilities in response to continued improvements in financial markets," the Fed said in a statement.
Meanwhile, existing-home sales fell 2.7 percentin August, a surprise as economists had expected a 2.9 percent increase, particularly after a sharp increase in July.
This came after stocks shed 0.8 percent Wednesday following a late selloff. Stocks had initially risen after the Fed statement as investors cheered the Fed's improved language on the recovery. But doubt began to creep in as investors worried that the Fed's announcement to slow the pace of buying mortgage debt was the equivalent of firing a warning shot that it plans to start unwinding stimulus. That sparked worries about how the economy would fare without being propped up by the government.
The moves of the past few days highlight just how conflicted investors are: On one hand, they want to see signs of an economic recovery. On the other, they're somewhat disturbed by the idea that the Fed may tighten sooner rather than later.
Since the Fed meeting, the dollar has reboundedand gold and crude have declined, with gold falling below $1,000 and crude settling below $66 a barrel today.
Today's Treasury auction was met with solid demand: The Treasury auctioned $29 billion of seven-year notes, with a high yield of 3.005 percent. The bid-to-cover ratio was 2.79. It was a mixed bag this week: Demand was weak for yesterday's five-year auction, but strong for Tuesday's two-year auction.
Earlier, investors had cheered a report that showed the number of U.S. workers filing new claims for jobless benefits fell by 21,000last week, when economists were expecting an increase of 5,000. A less-volatile gauge of claims fell to an eight-month low.
Natural-resource stocks took a hit: Caterpillar and Chevron were among the biggest drags on the Dow.
Citigroup dropped 2 percent following a report in the Wall Street Journal that the bank is planning to narrow the focus of its branch network to six major metropolitan areas. The bank will focus on New York, Washington, Miami, Chicago, San Francisco and Los Angeles, paring business in Boston, Philadelphia and Texas.
The largest run of initial public offerings to hit Wall Street in two years accelerated.
Shares of A123 Systems, a company born out of the MIT school in Massachusetts, soared 50 percent on their debut on the Nasdaq. The company, which makes lithium-ion car batteries increased the numer of shares in its IPO and priced them late Wednesday at $13.50, raising much more than expected. The stock symbol is "AONE."
A123, which is poised to benefit from the increasing popularity of hybrid and electric cars, is stirring speculation that this is the next big thing— the new ethanol.
But Ford slipped after JP Power & Associates said expects auto sales to plunge in September, back to their worst levels of 2009, as the glow of the "Cash for Clunkers" program has worn off.
Electronic Arts shares tumbled 2.7 percent after Microsoft shot down talk that it might take over the videogame maker.
Amid talk that it could be another terrible holiday season, there was a bright spot for retailers: Goldman Sachs upgraded its price targets on several retailers, saying it thinks September-to-date trends are robust and could continue into the holiday season. Among those Goldman raised its price target on were: Abercrombie & Fitch, AnnTaylor and Chico's FAS.
Homebuilders took a hit after the disappointing existing-home sales report and ahead of tomorrow's new-home sales reading. Beazer and Hovnanian fell sharply.
Blackberry maker Research In Motion lost more than 3 percent ahead of its earnings, which came after the bell.
RIMM beat its earnings targetbut missed the mark on sales and shares fell about 10 percent after-hours. The stock had risen nearly 20 percent since July amid hopes that the recovery would spur business and consumer spending on technology.
Volume was moderate, with about 1.37 billion shares changing hands on the New York Stock Exchange. Decliners outpaced advancers, roughly 7 to 2.
This Week:
THURSDAY: G-20 summit starts
FRIDAY: Durable-goods orders; consumer sentiment; new-home sales; Earnings from KB Home
Send comments to cindy.perman@nbcuni.com.
