Stocks ended lower after the Federal Reserve said it would reinvest proceeds from maturing mortgage securities into the Treasury market.
The Dow Jones Industrial Average fell 54.50 points, or 0.5 percent, to 10,644.25, after being down nearly 150 points earlier.
The Dow's biggest decliners were Intel , Alcoa and Travelers . Merck and Pfizer were among the few Dow stocks to advance.
The S&P 500fell 6.73 points, or 0.6 percent to 1,121.06 while the Nasdaqskidded 28.52 points, or 1.2 percent to 2,277.17. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose above 22.
The Federal Reserve held interest rates steady, as widely expected, and said that it planned to reinvest money from maturing mortgage securitiesinto government debt and said economic growth would likely be "more modest" than previously expected.
The Fed statement broughta “relief rally,” as some market players were worried the Federal Reserve would stop investing in the Treasury market, said Dan Cook, Senior Market Analyst of Chicago-based brokerage firm IG Markets.
Although the market pared its losses on the news, the Fed's move to reinvest mortgage proceeds is largely symbolic, according to London-based Capital Economics.
It's "designed to reassure the markets rather than boost the economy," the firm said in a research note.
By taking this “small step,” and by acknowledging that the pace of the recovery has slowed, the Fed “leaves it on the table to re-engage the quantitative easing machine,” said Cook of IG Markets.
Earlier in the day, a disappointing economic report out of China rattled the markets, particularly materials. BHP Billiton and Rio Tinto both lost more than 2 percent. China's trade surplus unexpectedly soaredin July, a sign that the nation's economy is still struggling.
Walmart shares were slightly higher after slipping earlier following news that the discount giant may be rolling back its rollbacks.
Hewlett-Packard fell slightly after taking a beating Monday over CEO Mark Hurd's resignation late Friday, which occured after an investigation found he had falsified expense reports to conceal a relationship with a female contractor. Oracle CEO Larry Ellison blasted the company for forcing Hurd to resign.
ExxonMobil skidded following news that a deal with Qatar Petroleum for a $6 billion petrochemicals facility in Qatar.
Financial stocks Bank of America and Citigroup also declined.
Banking regulators on Tuesday asked for public comment on alternatives to private credit ratings for assessing bank capital levels, beginning a process of replacing private credit ratings as required under the Dodd-Frank financial-reform law.
In other economic news, wholesale inventories rose 0.1 percentin July, while sales fell 0.7 percent; economists surveyed by Reuters had expected a more robust build in inventories and a sales increase.
And the latest survey from the National Federation of Independent Business showed continued pessimism about the future and the Labor Department reported U.S. nonfarm productivity fellin the second quarter, a discouraging sign for the recovery.
Meanwhile, the San Francisco Fed said Monday in its economic letter that the probability that the U.S. economy will slip back into recession over the next two years is higher than that of economic expansion.
Tech stocks were one of the biggest decliners amid a flurry of news out of the sector, with the tech-heavy Nasdaq the hardest hit of the three major indexes.
JP Morgan came out with a report seeing a glut in personal computer components, hurting Intel and Advanced Micro Devices, which plunged more than 7 percent. Intel also suffered after Barclays Capital said Apple’s iPad is eating into Intel's chip sales. Barclays cut shares of the world’s largest chipmaker to "equal weight" from "overweight."
Tawian Semiconductor, meanwhile, reported chip sales hit a fresh record but investors are worried that demand may have peaked.
Business-software maker Novellslashed its third-quarter revenue forecast.
But Netflix shares soared following news that the company has reached agreements to have films from Paramount Pictures, Lions Gate and MGM available to its customers just three monthsafter they appear on the pay TV Channel, Epix.
And U.S.-traded shares of Research In Motion rose after the Canadian company got a reprievefrom a threatened ban on its BlackBerry services in Saudi Arabia.
Cisco fell sharply ahead of its earnings release, scheduled for after the bell on Wednesday, although the company is expected to post increased sales.
Walt Disney was slightly higher ahead of the entertainment company's earnings releaseafter the bell.
Kohlberg Kravis Roberts , one of the world's biggest private equity companies, canceled plans for a $500 million public offering, without elaborating on the reason for its decision.
The Treasury sold $34 billion in three year notes to strong demand, for a yield of 0.84 percent, signaling investors are still flocking to the safety of U.S. government securities. The bid-to-cover ratio—or the amount bid for each dollar auctioned—was 3.31, the second-highest since the government re-started the three-year-note auction.
In merger news, Sanofi-Aventis , the French pharmaceutical company, sent a private letter outlining its desire to buy Genzyme , which has yet to respond, according to people familiar with the matter.
Ahead This Week:
WEDNESDAY: MBA purchase applications, international trade data, oil inventories; 10-year note auction; Earnings before the bell from Macy's and after the bell from Cisco
THURSDAY: Dell's annual meeting, jobless claims, import and export prices, 30-year bond auction; Earnings before the bell from Kohl's and after the bell from Nordstrom and Nvidia FRIDAY: CPI, retail sales, consumer sentiment, business inventories; Earnings before the bell from JC Penney
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