Stocks ended off earlier lows but still lost more than 1 percent Wednesday as China, earnings and the dollar's gains clipped the market's momentum after Tuesday's rally.
The Dow Jones Industrial Averageshed 122.28, or 1.1 percent to close at 10,603.15, erasing all of the prior session's gains. It was the worst one-day percentage drop so far this year. The S&P 500fell 1.1 percent and the Nasdaq dropped 1.3 percent.
Most Dow components finished lower, with IBM, Kraft and Alcoa at the bottom of the pack. Bank of America, Merck and Disney were among the few gainers.
A decline like this is to be expected, given the variety of challenges the market is facing, said Kathy Boyle, president of Chapin Hill Advisors in New York.
We're going to have these major swings," Boyle said. "Stocks are in a hammer patternand it looks like they're rolling over."
The dollar hit a one-month high against the euroamid worries about Greece's financial situation, and rose against other currencies as the election of a Republican for a U.S. Senate seat in Massachusetts raised expectations for spending cuts in Washington.
The U.S. currency held its gains despite a report this morning that housing starts fell unexpectedly in December. The Mortgage Bankers Association said demand for home loans rose 9.1 percent last week as mortgage rates hit a one-month low.
In other economic news, producer prices were essentially flat last month. The EIA will not be out with its usual weekly report on oil inventories due to Monday's holiday. Instead, the weekly inventory report will be out Thursday at 11 am.
Also at play today is China: Authorities there are taking aggressive steps to curb bank lending, in order to tamp down inflation and poke the real estate and commodities bubbles. That's also given the dollar a boost and taken a toll on material and energy stocks.
And then, of course, there's the January effect: Markets typically rise in the first two weeks of January then peter out by the third week.
Health-care stocks gave up early gains as the glow of the Republican win for the Massachusetts Senate seat formerly held by the late Ted Kennedy faded. The sector had benefitted as analysts suggested the win sounded the death knellfor President Obama's health-care reform.
Such expectations had propelled stocks to new 15-month highson Tuesday.
IBM was the biggest drag on the Dow, and made techs the day's biggest decliner, after the computer-services company beat earnings estimates and raised its forecast but delivered weak revenue.
Apple fans, you might want to sit down for this next tech bit: Buzz this morning is that the company may team up with Microsoft — no, that's not a typo — and use Bing as the default browser on the iPhone.
Bank stocks were one of the only bright spots — or, should we say least-bad spots — as traders were encouraged by an improving credit trend in Bank of America and other banks. Plus, many suspect that financial regulation may move to the back burner, or at the very least be modified. Though many remained cautious about the outlookfor the sector.
Bank of America led a parade of banks earnings this morning, disappointing investors with a loss of $5.2 billion, or 60 cents a share, which was worse than the 52 cents expected, but the nation's largest bank said its credit problems are beginning to stabilize. Its provision for credit losses dropped 14 percent during the quarter to $10.1 billion.
BAC shares gained 1 percent, finishing at the top of the Dow pack. And, while all 10 key S&P sectors ended lower, financials were the best performer, down about 0.1 percent. (The hardest hit were energy, materials and IT, which lost 1.5 percent or more.)
Morgan Stanley reported its second straight profit but earnings fell short of analysts' expectations.
Wells Fargo , meanwhile,posted an unexpected profit of 8 cents a share, despite having to repay $25 billion in government bailout money, and Bank of New York Mellon reported its earnings rose sharplyamid an increase in assets.
US Bancorp said its profit more than doubledas mortgage banking revenue and deposits grew but continued to see more bad-loan writeoffs.
Coach shares tumbled more than 5 percent as the handbag maker reported same-store sales rose just 3.2 percent in its latest quarter, falling short of expectations. Plus, the stock has more than tripled since its low last March below $12 as investorrs bet on luxury's recovery.
After the bell today, we'll get reports from eBay, Starbucks and Xilinx, among others.
Shareholders in Warren Buffett's Berkshire Hathaway will vote today on a 50-1 stock split for Berkshire's class B shares (BRK/B), paving the way for the company's deal to buy Burlington Northern. Such a split could also pave the way for Berkshire's inclusion in the S&P 500.