Stocks slide on Fed, housing woes

NEW YORK (CNNMoney.com) -- Stocks slumped Tuesday afternoon as investors considered weak reports on housing and consumer confidence, the minutes from the last Federal Reserve policy meeting and the latest signs of mortgage and credit market turmoil.

The Dow Jones industrial average (down 157.86 to 13,164.27, Charts) sank 1.2 percent with less than 90 minutes left in the session, while the broader S&P 500 (down 18.78 to 1,448.01, Charts) index lost 1.3 percent. The tech-fueled Nasdaq Composite (down 33.96 to 2,527.29, Charts) lost 1.3 percent.

The stock selloff briefly picked up speed in the moments after the release of the Fed minutes, but managed to recover some of those losses, only to sink back near session lows once again. (For more on the Fed minutes, click here.)

After bottoming out in mid-August, stocks rallied back last week on hopes that the Fed will cut its key short-term interest rate in a bid to keep cash flowing through the economy. But that advance petered out this week.

"We had a strong rally off the bottom in the last week or so," said Timothy Ghriskey, chief investment officer at Solaris Asset Management. "The pullback we've seen this week is a little profit-taking in what is an extremely slow period for the markets."

He said that many Wall Street professionals were now taking vacations after deferring them in early August due to the market turmoil.

Stocks fell Monday on a weak July existing home sales report. Tuesday brought more evidence of erosion in the sector after a Standard & Poor's report showed that home prices fell 3.2 percent in the second quarter versus a year ago.

A separate report showed consumer confidence slumped in August to a nearly 2-year low, reflecting a brutal summer on Wall Street in which stocks slumped amid worries about the credit and mortgage markets and oil prices surged.

The afternoon brought the release of the minutes from the Aug. 7 Fed policy meeting, in which the bankers stressed that the economy was holding up, but that it could deteriorate further due to the weak housing market. Should it deteriorate further, action by the bank would be necessary, the minutes said.

But the minutes provided only minimal help to stock investors looking for direction from the Fed, as the central bank seemingly made changes to its outlook shortly after the last meeting.

In the days after, the Fed joined central banks around the world in injecting billions into the banking system, to cool markets, and also cut the discount rate, which affects bank loans. Investors are now hoping that the central bank will also cut the federal funds rate - which impacts consumer loans - at its next policy meeting in September.

"We think the Fed will ease the fed funds rate by 25 basis points at the September meeting," Ghriskey said. There are 100 basis points in a percentage point.

Ghriskey said that while a cut would appease the markets, it wouldn't necessarily suggest a big change in fed policy. "If the economy picks up enough steam, they could end up lifting rates again," he said.

Also weighing on stocks Tuesday: more problems for the financial sector amid the credit market turmoil.

State Street (down $2.22 to $61.66, Charts, Fortune 500) fell 3 percent on reports that the money manager has exposure to $22 billion of asset-backed commercial paper conduits, the kind of assets that have hurt European rivals recently, according to a report published in British paper The Times.

European bank Barclays (down $1.61 to $47.33, Charts) also slipped on reports that it may have exposure to several hundred millions of dollars of failed debt, Briefing.com reported. However, Barclays has denied this.

In addition, Merrill Lynch reportedly downgraded Citigroup (down $1.10 to $46.69, Charts, Fortune 500), Lehman Brothers (down $2.80 to $54.95, Charts, Fortune 500) and Bear Stearns (down $2.01 to $110.19, Charts, Fortune 500), according to Briefing.com.

In other corporate news, Warren Buffett's Berkshire Hathaway has reportedly bought another 10 million shares in Burlington Northern Santa Fe (down $0.37 to $79.96, Charts, Fortune 500).

Additionally, MedcoHealth Solutions (up $0.10 to $86.21, Charts, Fortune 500), a pharmacy benefits manager, said it will buy PolyMedica (up $6.42 to $51.71, Charts), a diabetes treatment supplier, for $1.5 billion. Medco shares were little changed, while PolyMedica shares jumped 14 percent.

Among other movers, stock declines were broad based, with 28 out of 30 Dow issues falling, with Alcoa (down $1.09 to $35.89, Charts, Fortune 500), Boeing (down $2.19 to $96.35, Charts, Fortune 500), American Express (down $1.69 to $58.27, Charts, Fortune 500) and Caterpillar (down $1.45 to $74.55, Charts, Fortune 500) all down at least 2 percent.

Tenet Healthcare (down $0.32 to $3.36, Charts, Fortune 500) slumped 7 percent in active New York Stock Exchange trade after Credit Suisse First Boston began coverage on the hospital operator sector with an "overweight" rating.

Market breadth was negative. On the New York Stock Exchange, losers beat winners five to one on volume of 800 million shares. On the Nasdaq, decliners topped advancers by more than 3 to 1 on volume of almost 1 billion shares.

Treasury prices rose, lowering the yield on the 10-year note to 4.54 percent from 4.57 percent late Monday. Bond prices and yields move in opposite directions.

In currency trading, the dollar inched higher versus the euro and eased against the yen.

U.S. light crude oil for October delivery rose 8 cents to $72.05 a barrel on the New York Mercantile Exchange.

COMEX gold for December delivery fell $2.70 to $673.50 an ounce.