Tuesday's slump in stocks comes as the major indices have traded at recent highs. On Monday, the S&P ended nearly double the low intraday trading level of 666 reached in March 2009.
But the softness also likely reflects disappointment that retail sales in December weren't as strong as many had thought, Bruce McCain, chief investment strategist at Key Private Bank in Cleveland told CNBC.com.
"I think expectations of improving growth were filtering into the market—they’ve certainly been filtering into economic projections," McCain said. "It is a bit of shock," he said, that retail sales were "not quite as good as they hoped (they) would be."
McCain said he wasn't surprised sales weren't stronger, given data he has tracked on spending as a percentage of income that showed consumers were holding back. One barometer is medical spending, he said. There's evidence consumers are delaying or avoiding key medical procedures, and are even walking away from prescriptions they had filled after learning the costs.
"We’ve seen a cautiousness that suggests that people are feeling pretty stretched in terms of their budgets," McCain said.
But some market participants expect today's sell-off of less than half of a percent in each of the major indices is merely a pause. Fund managers, in fact, are more bullish than everon the equity markets, according to a recent Merrill Lynch survey.
The overall market is in great shape and stocks should continue rising, Neil Hennessy, portfolio manager and CIO of Hennessy Funds, said on CNBC.
“I still see another 6 percent on the upside this year and we’ll close around 13,000[on the Dow],” Hennessy said, adding that his favorite sector is the low-end retailers.
As a group, energy stocks were the worst performers throughout the session, led by FMC Technologies, which fell short on fourth-quarter earnings and reported that margins for its oil and gas processing systems would decline this year after hitting records in the fourth quarter.
Materials stocks were led lower by Monsanto and other fertilizer companies, which are hurting as farmers reel from falling grain prices.
Most retail apparel stores traded flat to down on Tuesday, although Gap rose more than 5 percent after news Edward Lampert, chairman of Sears Holding, has a 5.8 percent passive stake in the retailer.
Other consumer discretionary names also helped to keep the market from sinking, namely hotel stocks, including Marriott International , which rose after news the hotel operator would spin off its timeshare businessand split into two companies, and Wyndham Worldwide . Wyndham also has a timeshare business.
Banks weakened Tuesday afternoon after moving higher earlier in the session, and despite news of a drop in credit-card default rates. JPMorgan's net charge-offs fell to 5.97 percent in January from 6.99 percent in December and 7.16 percent in November, while Bank of America's net charge-offs fell to 9.20 percent in January, from 9.31 percent in December and 9.92 percent in November. American Express' net charge-offs fell to 3.8 percent in January from 4.1 percent in December and 4.4 percent in November.
Transportation stocks provided one bright spot in the market, as the Dow Jones Transportation Averagerose slightly.
In other merger news, Sanofi-Aventis agreed in principle to buy Genzyme for $19.2 billion in cash plus future payments based on the performance of an experimental drug, Reuters reported, citing a source with knowledge of the talks.
In further earnings news, satellite radio company Sirius XM Radio sank after reporting a loss for the fourth quarterTuesday morning, due to rising operating expenses.
FedEx gained despite cutting its earnings forecast for the current quarter, citing disruption from winter storms in the United States and Europe and higher fuel prices. The delivery company's shares initially fell in after-market trading.
Barclays advanced after reporting results that were better-than-expected and announcing the bank would sell assets and cut annual costs by $1.6 billion.
Also getting a boost from earnings was Marsh & McLennan , which did well in its risk and insurance division.
Dell will announce quarterly earnings after the bell. Analysts polled by Thomson Reuters expect the computer hardware company to have earned 37 cents per share in the fourth quarter on revenue of $15.7 billion.
An SEC filing showed late on Monday that Warren Buffett’s investment firm Berkshire Hathaway sold eight stocksthat had been listed in its third-quarter portfolio filing, including Bank of America , Comcast and . (Read more: Berkshire's 15 Biggest Holdings.)
Other big investors also revealed changes in their latest holdingsin their quarterly SEC filing, called a 13F. Among the changes, Appaloosa Management, run by David Tepper, nearly doubled its stake in Citigroup , and Coatue Management also took a big position in the bank.
Also, Greenlight Capital, run by David Einhorn, has taken a stake in Sprint Nextelas well as BP, while John Paulson moved into energy producers.
In trading, US Steel gained after Goldman Sachs raised the steel producer to "buy" from "neutral," saying the company will benefit from rising steel prices. Goldman also raised its price target for company to $75 a share from $61.
Netflix shares fell more than 3 percent after hitting a new high on Monday. Morgan Stanley downgraded the subscription streaming service to "equalweight" from "overweight," citing steep valuations for the company.
And Green Mountain Coffee Roasters fell after news Starbucks will provide coffee for Courtesy Products' one-cup brewing systems, used in high-end hotel rooms. Reuters reports Starbucks is also in partnership negotiations with Green Mountain.
JDS Uniphase sank after Bernstein Research downgraded the optical components maker to "market perform" from "outperform", citing lofty valuations.
Shares of Nokia rose on rumors
Meanwhile, A.C. Moore Arts & Crafts skyrocketed after the company said it was exploring strategic alternatives, including a possible sale.
Volume on the consolidated tape of the New York Stock Exchange was 3.9 billion shares, with 929 million changing hands on the NYSE floor.
The dollar fell slightly against a basket of currenciesas the euro rose for the first time in four days. The price of oilalso fell, slipping to $101.64 a barrel for Brent crude and to $84.32 a barrel for U.S. light sweet crude. Gold rose to close at$1,373.60 an ounce.
A slew of economic news was released Tuesday morning. One of the most closely watched reports Tuesday was retail sales, which rose 0.3 percentin January, according to the Commerce Department. That was less than the 0.6 percent gain expected by economists polled by Reuters, thanks to weaker sales at building materials' stores and restaurants. In December, sales rose 0.5 percent, less than the previously reported 0.6 percent gain.
Also, business inventories in December gained 0.8 percent, the Commerce Department reported, up from a 0.4 percent gain in November. And a reading on home builder sentiment was unchangedat a low level for the fourth consecutive month, according to The National Association of Home Builders/Wells Fargo Housing Market Index. The index was 16, in line with expectations.
And U.S. import prices soared 1.5 percent, the Labor Department said. That's nearly twice the 0.8 percent gain expected by economists surveyed by Reuters.
Meanwhile, a gauge of manufacturing in New York State rose more than expected to 15.43 in February, its highest level since June, and up from 11.92 in in January, according to the New York Fed's Empire State index.
U.S. inflation rates will take center stage later this week when the government releases figures on producer prices on Wednesday and consumer prices on Thursday. In the U.K., consumer prices surged 4 percent in January, double the Bank of England’s target, which will force the U.K. central bank to consider a hike in interest rates.
Inflation in China, meanwhile, rose 4.9 percent in January, which was less than expected, figures released on Tuesday showed, though price pressures are strong, which should force the Chinese central bank to continue tightening monetary policy.
In other exchange news, Brazil's BM&FBovespa, the world's fourth-largest financial exchange operator, is closely watching for tie-up opportunities, Chief Executive Edemir Pinto told Reuters.
In Europe, markets closed higher, led by Barclays. The FTSEurofirst300 index rose 0.1 percent.
On the Calendar:
TUESDAY: Earnings after-the-bell from Dell and Tesla.
WEDNESDAY: Weekly mortgage applications, housing starts, PPI, industrial production, House hearing on FCIC report, oil inventories, FOMC minutes; earnings before-the-bell from Comcast; earnings after-the-bell from CBS, NetApp and Nvidia.
THURSDAY: Weekly jobless claims, CPI, leading indicators, Philadelphia Fed survey, Chicago Fed President speaks, money supply; earnings before-the-bell from Barrick Gold, AngloGold and Nordstrom.
FRIDAY: Earnings before-the-bell from Campbell Soup.
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