Financials led the markets lower following more dismal news on the housing market Tuesday when the S&P/Case-Shiller home price index showed U.S. home prices fell to a new recession low in the first quarter.
Banks are exposed to the housing market not only through their loan portfolios, but also through holdings of mortgage-backed securities.
Should the worst-case scenario take place in which home prices decline by 15 percent (between now and December 2012), Devi Aurora, analyst at S&P, said the banking sector could take up to $80 billion in loan losses.
In further bad news for the housing market, the Mortgage Bankers Association reported its index ofmortgage applications fellalmost 4 percent last week, led by refinancings, which fell 5.7 percent.
Auto sales will be released throughout the day, with higher prices and a shortage of fuel-efficient cars seen denting the sector's recovery.
Toyota fell after news it was recalling 105,000 early models of the Prius because of problems with power steering and the gearbox.
Nokia fell to a 13-year low after at least 8 brokerages cut their price target on the stock. The maker of mobile phone handset tumbled on Tuesday after cutting its sales outlookand saying it expects net sales from its products and services to be far worse than initial projections.
And Macy's gained slightly after reporting a 7.4 percent gain in May sales, beating the 5.6 percent gain expected by analysts. Most retail outlets are reporting same store sales on Thursday.
But Dollar General sank after the discount retailer's first-quarter profits fell short of expectationsas it needed to cut prices on clothes.
Tiffany , meanwhile, fell after Deutche Bank downgradedthe luxury retailer to "hold" from "buy."
Sealed Air gained after news the maker of Bubble Wrap will buy Diversey Holdings, a private cleaning product company, for $2.9 billion in cash and stock.
And KKR said it was selling the principal subsidiary of Hilcorp Resources for $3.5 billion to Marathon Oil. The deal is for 140,000 acres in the Eagle Ford shale field in South Texas.
Lions Gate Entertainment jumped after beating analyst expectations for fiscal fourth quarter profits thanks to lower distribution and marketing costs. Revenues, however, fell short.
The dollar fell against the euro and a basket of currenciesafter news of U.S. manufacturing activity slowing in April. Oil prices also fellslightly. U.S. light, sweet crude fell to just above $102 a barrel, while in London, Brent crude fell slightly to just above $116 a barrel.
On the U.S. economic front, the Institute for Supply Management's index of manufacturing fell to 53.5 in May from 60.4 in April, the lowest level since September 2009. Analysts expected the index to fall to 57.7.
Construction spending, meanwhile, rose 0.4 percent in April to an annual rate of $764.98 billion, the biggest gain in six months, the Commerce Department reported. But spending in April was revised down to a 0.1 percent gain from the previously reported 1.4 percent gain.
Economists surveyed by Reuters had expected construction spending to rise 0.3 percent.
The private sector added only 38,000 jobs in May, according to a jobs report from Automatic Data Processing and Macroeconomic Advisers. That's far less than most analysts had expected.
In April, the private sector had gained 177,000 jobs, down from the 179,000 initially reported.
The weak payroll report combined with the bleak manufacturing news is prompting analysts to cut their forecasts for April non-farm payrolls, which will be released by the Labor Department on Friday.
Goldman Sachs cut its forecast to a 100,000 gain from 150,000, while Credit Suisse cut its forecast to 120,000 from 185,000. Economists surveyed by Reuters had expected payrolls to rise by 180,000 in May, down from a gain of 244,000 in April.
Another report showed the planned layoffs rose 37,135 job cuts last month, up 1.8 percent from April, and up 4.3 percent from a year ago, according to Challenger, Gray & Christmas, an outplacement firm. For the year, job cuts are 21 percent less than the same period last year.
In Europe, stocksstalled on renewed worries over Greece's debt troubles.
On Tap This Week:
WEDNESDAY: Auto sales; D9: All Things Digital Conference.
THURSDAY: Chain store sales, jobless claims, factory orders, natural gas inventories, oil inventories, money supply.
FRIDAY: Non-farm payroll report, ISM non-manufacturing index; Wal-Mart shareholder meeting.
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