A sharp drop in consumer confidence sent stocks and interest rates falling.
The Conference Board said Tuesday its consumer confidence index fell to 46 in February from 56.5 last month. Economists polled by Thomson Reuters expected a reading of 55.
Not only did the index fall sharply, it is far from indicating strength in the economy. A reading above 90 means the economy is on solid footing. Consumers are vital to a strong, sustained economic recovery because their spending accounts for more than two-thirds of all economic activity.
The disappointing report added to the cautious view investors have taken this week about a consumer-led recovery. A fresh round of earnings from retailers before the market opened showed earnings are up but that sales growth is lagging.
Home Depot Inc., Sears Holdings Corp., Macy's Inc. and Target Corp. all reported better-than-expected earnings.
The market is concerned that a strong, sustained economic recovery is unlikely until consumers are more confident with their finances and job security. The unemployment rate currently stands at 9.7 percent.
In morning trading, the Dow Jones industrial average fell 68.47, or 0.7 percent, to 10,314.91 after being up around 19 before the consumer confidence index was released. The Standard & Poor's 500 index dropped 11.09, or 1 percent, to 1,096.92, while the Nasdaq composite index fell 26.57, or 1.2 percent, to 2,215.46.
About three stocks fell for every one that rose on the New York Stock Exchange, where volume came to 172.4 million shares, compared with 163.5 million traded at the same point Monday.
Tuesday's trading extended the losses the market suffered Monday, when it ended a four-day win streak. Investors who last week were feeling more optimistic about the economy are having misgivings following two days of downbeat consumer news.
Meanwhile, interest rates fell in the bond market as Treasury prices rose. Investors were betting that a weak recovery will force the Federal Reserve to keep interest rates low. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.72 percent from 3.80 percent late Monday.
A modest increase in sales and cost-cutting helped Home Depot's profit top expectations. The home improvement retailer also raised its dividend and outlook, evidence it is confident about the strength of an eventual recovery. Competitor Lowe's Corp. on Monday also raised its outlook, but had a cautious tone about growth.
Like Home Depot, Sears Holdings said falling expenses and a slight boost in sales helped its profit surpass forecasts. Macy's and Target also reported upbeat quarterly earnings.
Home Depot rose 21 cents to $30.53. Sears fell 56 cents to $95.10, while Target dropped $1.45, or 2.9 percent, to $49.19. Macy's fell 18 cents to $18.29.
A report on home prices showed that the housing market continues its slow recovery. The Standard & Poor's/Case-Shiller 20-city home price index rose 0.3 percent from November to December.
Home prices' rate of decline from a year earlier also improved. That measure fell 3.1 percent. Economists had forecast a year-over-year drop of 3.2 percent, compared with a decline of 5.3 percent in November.
The dollar rose slightly against other major currencies. Gold and oil both fell.
The Russell 2000 index of smaller companies fell 7.32, or 1.2 percent, to 624.93.
Overseas markets mostly fell after disappointing economic reports from Germany. Germany's DAX index fell 0.6 percent and France's CAC-40 dropped 0.8 percent. Britain's FTSE 100 rose 0.1 percent. Japan's Nikkei stock average fell 0.5 percent.