Stocks closed lower amid more bad news in the financial sector and a report showing the Federal Reserve is more worried about a recession than it has previously indicated.
Washington Mutual led S&P losers after the bank said it will receive a $7 billion capital injectionfrom private equity firm TPG and other investors, sharply diluting its stock. The bank also said it was expecting a $1 billion first-quarter loss and lowered its dividend, sending the message to investors that the banking crisis had not yet passed.
Meanwhile, the minutes of the Fed's March meeting released Tuesday afternoonshowed that some members of the central bank were worried that the housing and financial sectors could push the economy into a deep recession.
"Some believed that a prolonged and severe economic ownturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market," minutes of the March 18 meeting said.
Disappointing earnings from several areas, including semiconductor Advanced Micro Devices , weighed on stocks throughout the day.
"We've got earnings reports coming up and there are going to be some bad reports, some surprises. The biggest surprise may be that some of the earnings reports are not as bad as what some people are bracing for," Peter Miralles, of Atlanta Wealth Consultants, said in explaining the market's lackluster day, a mood he linked to the fortunes of the stabilizing dollar.
"The market tends to be moving more with the dollar than with anything else right now. Oil's going up or down based on how the dollar's doing to a certain extent," he said. "If the dollar can stabilize maybe for a couple months, the market can stabilize too until we get into stronger confidence levels."
The dollar spent much of the trading session up against the euro and the yen, but fell after the Fed news, taking stocks down as well.
"We're clearly going through a bottoming phase," said Stephen Porpora, of William O'Neill. "We still have some nagging problems like the dollar, commodity prices, oil prices, the financial crisis seems to be coming out. So I say wade in carefully, but the tone of the market is quite good."
Weight-management company NutriSystems saw its shares surge after the company said earnings would be better than expected amid a transitioning into a new CEO.
But there was trouble aplenty in the financial sector.
Loan securitizer First Marblehead saw its shares tumble after the company said it was looking for a new guarantor because one of its partners filed for bankruptcy.
In other banking news, Merrill Lynch, which so far has written down $24 billion in investment related to the U.S. mortgage market, does not plan to raise further capital as it has already raised more than it has lost, Chief Executive John Thain said on Tuesday.
Citigroup and bond insurer American International Group were the biggest drags on the Dow blue-chips, while pharmaceutical Merck led the gainers.
In economic news, pending home sales numbers for Februarywere down by a greater-than-expected 1.9 percent, but the news did little to affect the broader market, which has mostly priced in the housing slump. However, home builders, including Lennar, were among the biggest losers on the S&P.