Stocks Drop More than 1% as Oil Tumbles

Stocks sank broadly, triggered by disappointing results from Alcoa, and as a report by Goldman Sachs calling for a drop in commodity prices sent oil prices on a nosedive.

The Dow Jones Industrial Average fell more than 115 points, after ending Monday's session flat as investors awaited the unofficial start to earnings season.

Among Dow components, Alcoa , Chevron and Exxon Mobil slid, while Wal-Mart gained.

The S&P 500 and the Nasdaq also fell 1 percent or more. The CBOE Volatility Index, widely considered the best gauge of fear in the market, surged above 18.

All key S&P 500 sectors declined, led by energy, materials and industrials.

Oil prices tumbled after Goldman said the oil market will experience a "substantial pullback" to $105 a barrel for London Brent crude. The benchmark had traded above $126 a barrel last week.

"We continue to believe that — even with the loss of Libyan production —the oil market has adequate inventory and OPEC spare production capacity to avoid the degree of physical tightness experienced in 2008 well into next year," Goldman said in a note to clients.

London Brent crude fell more than 2.5 percent, below $121 a barrel, while U.S. light crude fell more than 3.5 percent, below $106 a barrel.

Goldman's decision to also book profits on metals, including gold, silver, copper and platinum, sent prices of these commodities falling as well. Gold traded below $1,462 an ounce.

"I think we’re peaking out on commodity prices," says Jim Paulsen, chief investment strategist at Wells Capital Management, who said tightening policies in emerging markets like China are succeeding in slowing growth.

"You’ll see U.S. and global growth slow a bit, which takes upward trend out of commodities markets," Paulsen said.

The downdraft is being led by energy and materials sectors. Oil and gas drillers, suppliers, and producers pushed energy stocks lower, including Nabors Oilwell Varco , Nabors Industries and ConocoPhilips .

Alcoa led the materials sector lower after reporting first-quarter earnings of 28 cents per share, excluding one-time items. While earnings were slightly better than expected, the aluminum producer's sales of $5.96 billion, up from $4.89 billion in the same quarter last year, missed expectations by economists surveyed by Reuters who estimated Alcoa would report $6.07 billion in sales.

Cliff's Natural Resources and Freeport McMoran Copper & Gold also sank.

Also in earnings news, Chevron indicated its exploration and production earnings would be higher in the first quarter than they were in the fourth quarter.

JPMorgan Chase , Bank of America and Google will report earnings later in the week.

Commodities have set the tone for the markets recently as prices of gold, silver and oil have risen to new heights. Cisco traded flat after news it will overhaul its consumer products division and cut 550 jobs. Critics have targeted the division, saying the networking giant has strayed from its core business. Last week, CEO John Chambers admittedCisco had lost its way.

Procter & Gamble gained slightly after news the consumer products giant will raise its dividend 9 percent.

Level3 Communications fell a day after news the communication firm planned to buy Global Crossing for $23.04 a share in a tax-free, stock-for-stock sale. UBS upgraded Level3 on the news to "neutral" from "sell."

In economic news, the government reported import prices rose in March, and the trade deficit fell. Import prices rose 2.7 percent in March from a 1.4 percent gain in February thanks to higher oil and food prices, the Labor Department said Tuesday.

The trade deficit fell 2.6 percent in February to $45.8 billion, as exports fell 1.4 percent to $165.1 billion, the Commerce Department said. Imports fell 1.7 percent to $210.9 billion.

But Paulsen at Wells Capital Management points out that the trade deficit lags changes in currencies by 18-to-36 months, and that the current deficit reflects a period (summer 2008 to March 2009) when the dollar was strong.

"It takes awhile to change the direction of the trade boat," Paulsen said.

With dollar weaker now for nearly two years, Paulsen expects the trade deficit will begin to fall significantly, which should give a boost to gross domestic product this quarter or next.

"I can see where we go from '1-something' in the first quarter to '5-something' in the third," Paulsen said, referring to GDP. "I do think that’s what this sets up."

Also in economic news, small business optimism fell in March, which also damped investor enthusiasm. The National Federation of Independent Business' overall optimism index fell 2.6 points to 91.9. Although more owners raised prices, many expect economic activity to slow in the next six months.

The Federal Budget deficit will be released at 2 p.m., and is expected to have widened from $220.9 billion in February 2010 to $222.5 billion in February 2011.

Meanwhile, the Japanese government raised the severity of the incident level at the Fukushima nuclear power plant from 5 to 7 putting it on the same level as the 1986 Chernobyl disaster.

Hidehiko Nishiyama, a deputy director-general of the Nuclear and Industrial Safety Agency (NISA), said the decision to upgrade the warning about the radiation leak was the based on cumulative quantities of radiation released since the earthquake and tsunami which devastated Japan last month.

In Europe, the UK Consumer Price Index for March fell to 4 percent from a recent high of 4.4 percent.

While the latest inflation report surprised many analysts who believed inflation would hold steady, the number still remains 2 percent above the Bank of England’starget. Sterling fell around 0.5 percent against the dollar on the news.

The dollar, meanwhile, continued to slump against a basket of currencies.

On Tap This Week:

TUESDAY: 3-year Treasury note auction, Treasury budget, CFTC's Gensler testifies on derivatives regulation, Dudley speaks, Bank of NY Mellon shareholder meeting
WEDNESDAY: Weekly mortgage applications, retail sales, business inventories, oil inventories, 10-year Treasury note auction, Beige Book, United Technologies shareholder meeting; earnings from JPMorgan before-the-bell.
THURSDAY: Weekly jobless claims, PPI, 30-year Treasury bond auction, Kocherlakota speaks, Plosser speaks, Lacker speaks, Nestle shareholder meeting; earnings from Hasbro before-the-bell and Google after-the-bell.
FRIDAY: CPI, Empire state manufacturing survey, Treasury international capital, industrial production, consumer sentiment, credit card default rates reported; Evans speaks, Hoenig speaks, G24/International Monetary Affairs meeting; Earnings from Bank of America and Mattel before-the-bell.

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