By Jonathan Cheng
China's move to slow its economy collided with concerns about the foreclosure crisis to roil financial markets on Tuesday.
The Dow Jones Industrial Average had its worst day since mid-August, falling below 11000 and wiping out two weeks of gains. The average remains up 5.3% for the year-to-date. Bank stocks slid. Crude-oil futures fell below $80 a barrel in its biggest one-day decline in eight months, and gold dropped 2.6%.
While China's move to tighten interest rates was relatively small, its timing surprised investors, many of whom had been fixated on the U.S. market, where the Federal Reserve is expected to soon embark on a new round of monetary easing.
The Dow fell 165.07 points, or 1.48%, to 10978.62.
Tuesday's decline—on the anniversary of the Black Monday crash of 1987—snapped a rally that many had feared was getting long in the tooth. Stocks had rallied 11% since the end of August, in large part because of optimism that the Fed's stimulus would help fuel U.S. economic growth. But the gains belied worries that the Fed's action may not be enough to help juice the economy or drive corporate revenue. The recent debacle over foreclosures has only added to the nagging uncertainty.
"It just shows the nervousness of this market—in the first few weeks of October, people have had this nervous sense that something's going to break, this market can't just keep going up," said Ryan Larson, the Chicago-based head of U.S. equity trading at RBC Global Asset Management.
At the same time, the dollar enjoyed a one-day rebound, surging more than 1% against the euro, the pound, the Swiss franc and the Australian and Canadian dollars.
The sectors most exposed to global demand were the heaviest weights on the market, with energy and materials sagging at the prospect of a Chinese belt-tightening.
But Bank of America was the largest decliner, tumbling 4.4% to close at its lowest point since the financial crisis, after reports that a group of institutional investors and the Federal Reserve Bank of New York were suing the Charlotte, N.C., lender over mortgage securities. Other big banks shadowed BofA's decline, with J.P. Morgan Chase, Wells Fargo and Citigroup all shedding 1.3% or more.
"This is a reminder that much of the mortgage mess remains unresolved," said Brian Lazorishak, portfolio manager and quantitative analyst at Chase Investment Counsel.
Also weighing on the markets were technology stocks, which suffered from robust earnings from giants Apple and International Business Machines that nonetheless failed to impress the market. Apple dropped 2.7% while IBM lost 3.4%, bringing the two bellwethers off all-time highs reached on Monday. Yahoo, which fell 2.7% in Tuesday trading, recouped some of those losses after quadrupling quarterly profits after the market close.
The Standard & Poor's 500-stock index dropped 1.6% and the Nasdaq Composite Index fell 1.8%.
Ominously for market bulls, the losses came amid an increase in stock trading, with 5.7 billion shares changing hands in New York Stock Exchange composite volume—about 25% higher than Monday's trading volume. In another reflection of the investor skittishness, the Chicago Board Options Exchange Volatility Index, the "fear gauge" known as the VIX, jumped off its recent lows, rising as much as 12% during the day.
"The fact we're seeing heavier volume adds some legitimacy to the dip," said Mark Turner, co-head of sales trading for Instinet. "The Apple and IBM numbers got us off to a disappointing start last night, and the news out of China this morning had the dollar higher and commodities lower."
Jerry Webman, chief economist and senior investment officer with OppenheimerFunds, attributed some of the market pessimism to a speech by Federal Reserve Bank of Dallas President Richard Fisher, who said that "no decisions have been made" on another round of Treasury buying by the Fed.
"The Fed can wave the magic wand, but behind it, we need to see what might be unrealistic wishful thinking and temper our enthusiasm," Mr. Webman said. "There was a whole series of things today—'Fedspeak,' China tightening, Apple's guidance, revenue numbers and some of the technical data suggesting we're in an overbought market."
Among stocks in focus, Coldwater Creek plunged 35% after the women's apparel retailer sharply cut its fiscal third-quarter guidance below already-cautious expectations. Meanwhile, Massey Energy was the day's best performer on the S&P 500, jumping 5% after The Wall Street Journal reported the nation's sixth-largest coal miner is exploring strategic alternatives, including a possible sale.
Write to Jonathan Cheng at jonathan.cheng@wsj.com
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