NEW YORK – U.S. stocks fell nearly 2 percent on Tuesday as the prospect of more European bailouts and worries China will rein in inflation prompted investors to abandon risky assets.
The developments, especially questions about Ireland's financial stability, caused a spike in the U.S. dollar, which hit commodity prices. That in turn sent equities lower, with natural resources companies leading the way down.
"Is dollar strength just a correction in a larger trend of dollar weakness, or are we beginning to turn around here?" said Bill Strazzullo, partner and chief investment strategist at Bell Curve Trading in Boston.
"If it looks like the U.S. dollar is finally stabilizing here and gaining its footing, we're going to have a good-sized pullback in equities and commodities markets."
Asset classes have become increasingly entwined since investors placed bets ahead of the Federal Reserve's announcement of further quantitative easing. Now, many investors that bet on Fed stimulus are unwinding those risky positions.
One result was a slide in resource stocks, such as Alcoa Inc (AA.N), which fell 2.8 percent to $13.03, and Exxon Mobil Corp (XOM.N), which dropped 2.2 percent to $68.94. U.S. crude oil futures settled 3 percent lower at $82.34 a barrel, gold and metal prices fell and the dollar index jumped 0.9 percent.
The S&P materials sector (.GSPM) gave up 2.2 percent. Tech shares (.GSPT) also stumbled, falling 1.9 percent, as investors fled for safety.
The Dow Jones industrial average (.DJI) dropped 178.47 points, or 1.59 percent, to 11,023.50. The Standard & Poor's 500 Index (.SPX) shed 19.41 points, or 1.62 percent, to 1,178.34. The Nasdaq Composite Index (.IXIC) gave up 43.98 points, or 1.75 percent, at 2,469.84.
Ireland, which is grappling with a battered banking sector, said it was discussing stabilization measures with its European partners, while China is expected to unveil food price controls and crack down on commodity speculation to contain inflationary pressure.
The Chinese media reports increased expectations that China will further tighten monetary policy to help fight inflation.
The CBOE Volatility Index (.VIX), known as Wall Street's fear gauge, climbed 11.8 percent to 22.58, its highest close in more than a month.
The S&P found support around the 1,176 level, which is roughly the 23.6 percent Fibonacci retracement of the benchmark's recent rally from the 2010 low in July to its more than two-year high hit earlier this month.
After rallying nearly 13 percent through September and October, the S&P 500 has given up nearly 4 percent since November 5.
"If we don't see the S&P back above 1,200 in the next couple days, then I think we're potentially putting in some sort of top here," said Strazzullo.
Continued speculation over whether the Federal Reserve will spend all of the $600 billion it had earmarked for its latest round of quantitative easing also pressured the market.
St. Louis Fed President James Bullard said in an interview with Bloomberg Radio the central bank would scale down its planned purchases of Treasury bonds only if there was a strong improvement in the U.S. economy.
Global developments overshadowed a favorable U.S. corporate picture as Wal-Mart Stores Inc (WMT.N) and Home Depot Inc (HD.N) raised their profit forecasts for the year.
The two companies were the only Dow stocks to rise. Wal-Mart added 0.6 percent to $54.26 after it also forecast positive same-store sales for the holiday season, and Home Depot rose 1 percent to $31.71, though it cut its full-year sales outlook.
Volume surged with about 9.67 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above last year's estimated daily average of 9.65 billion.
Declining stocks handily outnumbered advancing ones on the NYSE by 2,642 to 405, while on the Nasdaq, decliners beat advancers 2,103 to 548.