Stocks hit as confidence slips

By Alexandra Twin, senior writer


NEW YORK(CNNMoney.com) -- Stocks tumbled Tuesday after a key measure of consumer confidence plunged, reflecting investors' growing pessimism about the strength of the economic recovery.

The Dow Jones industrial average (INDU) lost 100 points, or 1%. The 30-share Dow had lost as much as 115 points earlier.

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The S&P 500 index (SPX) lost 13 points, or 1.2%. The Nasdaq composite (COMP) fell 28 points, or 1.3%.

A mixed market turned negative after the late morning release of a weaker-than-expected reading on consumer confidence. The report reflected investor wariness this year amid some conflicting readings on the economy, debt issues at home and abroad, and lawmaker squabbling in Washington.

Stocks have been choppy lately, with the major indexes declining for four weeks, advancing for two weeks and then slipping again Monday -- despite some upbeat earnings and an $11 billion merger in the oil services sector.

The Volatility (VIX) index, Wall Street's so-called fear factor, rose 9% Tuesday as nervousness grew about the strength of the recovery.

"The bears and the bulls are in a tug of war, and today, the bears have the upper hand," said Bill Stone, chief investment strategist at PNC Financial Services Group.

He said that the consumer confidence number is one of the more forward-looking readings and is raising worries that the consumer -- already struggling in a battered labor market -- might pull back even more.

"Today it's a combo of a weak number and maybe needing to take a breather after the rally," Stone said.

Struggling after the rally: After a huge runup in 2009 based on expectations for a strong recovery in 2010, investors are now looking for proof that such a recovery will take hold.

A mixed batch of economic readings has put some doubt in the market this year, while better-than-expected fourth-quarter earnings and revenues have had little impact on investor sentiment.

China's decision to temper growth by limiting bank loans and fears of Greece's debt crisis spreading to other European nations have also played a role in the market's seesawing.

"In a broad sense, we're in the fourth quarter of a bull rally and a lot of the steam is out of it now," said Tom Hepner, financial adviser at Ruggie Wealth Management.

He said investors are looking past the fiscal and monetary stimulus that has propped up the economy over the last year and are looking at the earnings and economic reports. "We're looking at the so-called fundamentals of the market and we're not quite sure it's all there yet," he said.

Federal Reserve: Last week, the Federal Reserve surprised investors by boosting the discount rate, the emergency bank lending rate, by a quarter-percentage point, to 0.75%.

It was the first change in interest rates in over a year and signaled the very early stages of the Fed returning to a more normal phase of monetary policy. However, the move was largely symbolic, as the discount rate is rarely used.

Fed Chairman Ben Bernanke testifies on Capitol Hill Wednesday and Thursday. He is expected to discuss the economy and monetary policy, but investors will be listening to see if he says anything more about the central bank's plans to close out some of the emergency programs put in place during the height of the financial crisis.

Housing: The S&P/Case-Shiller Home Price index of the 20 largest metropolitan areas fell 3.1% in December versus a year ago, in line with estimates and an improvement after a drop of 5.3% in the previous month. However, the index rose 0.3% from November's levels, suggesting the housing market is continuing to recover.

On a quarterly basis, the index fell 2.5% versus a year earlier, an improvement over the last three years.

Jobs: The Senate on Monday agreed to move forward on a $15 billion jobs creation bill that gives businesses a tax break for new hires. The bill would also extend an existing break for spending money on investments like equipment and funds highway and transit programs through the rest of the year.

Toyota: Executives from the troubled auto manufacturer are in Washington this week to discuss the company's massive recall and future plans.

At the first of three congressional hearings, witnesses argued that the problems with the brakes could be tied to the vehicles' electronic throttle system.

James Lentz, the company's U.S. sales chief was testifying Tuesday and Akio Toyoda, the company's president, was due to testify Wednesday. Toyoda is expected to tell U.S. lawmakers that the rush to expand Toyota Motor's business led to the safety issues that resulted in the recall.

Quarterly results: A number of retailers reported results Tuesday, including Dow component Home Depot (HD, Fortune 500).

Home Depot said it returned to a profit in its fiscal fourth quarter after posting a loss a year earlier, with earnings of 18 cents per share, two cents better than expected. Home Depot also boosted its dividend. But the company gave a cautious 2010 outlook amid the still-fragile economic recovery.

Target (TGT, Fortune 500) and Sears Holdings (SHLD, Fortune 500) also reported better-than-expected quarterly profit. Sears is the operator of Sears and Kmart.

Banks: Over 700 banks are at risk of failing, according to a report from the Federal Deposit Insurance Corp. published Tuesday. The FDIC said that the number of banks on its so-called problem list has climbed to 702, the highest number in 6-1/2 years.

The number has increased steadily since the start of the recession in December 2007. However, only a small percentage of banks identified as being in danger end up failing.

World Markets: In overseas trading, European markets fell and Asian markets ended mixed.

The dollar and commodities: The dollar gained versus the euro and fell against the yen.

U.S. light crude oil for April delivery fell $1.45 to settle at $78.85 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery fell $9.90 to settle at $1,103.20 per ounce.

Bonds: Treasury prices rose, lowering the yield on the 10-year note to 3.70% from 3.79% late Monday. Treasury prices and yields move in opposite directions.

Market breadth was negative. On the New York Stock Exchange, losers beat winners seven to three on volume of 1.08 billion shares. On the Nasdaq, decliners beat advancers by over two to one on volume of 2.29 billion shares. To top of page

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