NEW YORK (CNNMoney.com) -- Stocks fell Tuesday after Standard & Poors cut Greece's debt rating to junk and lowered Portugal's debt rating, raising fears that a euro zone debt crisis could slow the global economic recovery.
The Dow Jones industrial average (INDU) tumbled 213 points, or 1.9%, closing below 11,000, a key psychological level. The Dow ended the previous session at its highest point in 19 months.
The slide was the Dow's biggest one-day point drop since July 15, 2009, when it lost 257 points.
Stocks were flat to lower in the morning as Goldman Sachs sought to defend itself on Capitol Hill against allegations it profited from the housing market collapse. But news that ratings agency Standard & Poor's had cut Greece and Portugal's debt ratings overshadowed everything else, giving investors a reason to retreat on the back of an 8-week advance.
"We're seeing the fear factor kick in about Greece and Portugal," said Peter Cardillo, chief market economist at Avalon Partners. "That's rattling the market."
He said that fear was also reflected in the so-called flight to quality as investors poured money into bonds and the euro fell to a new low for the year.
That was reflected by a jump in the CBOE Volatility index, Wall Street's so-called "fear gauge." It spiked 24%, hitting the highest point since February. Typically a surge in the VIX corresponds with a selloff in stocks.
Greece: Standard & Poor's cut its ratings on Greece's long-term debt status to "BB+" with a negative outlook from "BBB+." The double-B plus rating is considered to be speculative or "junk," and reflects the ratings agency's concern about Greece's long-term ability to get out from underneath the its current fiscal crisis. S&P cut Greece's short-term debt even lower.
S&P also cut Portugal's long-term debt ratings by two notches and the short-term rating by one notch, but did not lower the debt to junk status.
The cost of insuring both Greece and Portugal's debt rose to record highs following the news.
Worries about the fiscal health of Greece and the other so-called PIIGS have weighed on the stock market on and off since the start of the year as investors worry the weakness will destabilize the euro and hurt global growth. The PIIGS are Portugal, Ireland, Italy, Greece and Spain.
However, Cardillo said that markets were also ripe for a pullback after moving higher for the last few months.
Rally loses steam: The Dow has ended higher for eight straight weeks, its best winning streak since January 2004. The Nasdaq has also been on the rise for 8 weeks, while the S&P 500 rose for 7 of the last 8 weeks.
Prior to Monday's selloff, the Dow and S&P 500 were just shy of 19-month highs, while the Nasdaq was at the highest point in nearly two years.
A better-than-expected reading on consumer confidence, a weaker-than-expected rise in a key measure of the housing market and anticipation at the start of the Federal Reserve's two-day policy setting meeting were all in play. Better-than-expected results from Texas Instruments, DuPont and 3M provided some support.
Stocks were barely higher Monday in a quiet session at the start of a busy week on Wall Street. In addition to the housing and consumer confidence reports, a revised reading on first-quarter GDP growth is due later in the week, as well as quarterly results from roughly one-third of the companies in the S&P 500.
Goldman: CEO Lloyd Blankfein and other executives from Goldman Sachs were answering lawmakers' questions as part of a Senate hearing on the role investment banks played in the financial market meltdown in 2008.
Blankfein, in prepared testimony, denied that the company sought to profit from the housing market collapse, an allegation lawmakers have made recently.
Fabrice Tourre, the trader charged in the Securities and Exchange Commission's fraud case against Goldman Sachs defended himself, saying he categorically denied the SEC's allegations.
On the move: Financials, energy and technology, the three biggest movers of the market in terms of sectors, all fell.
Goldman Sachs (GS, Fortune 500) gained 1%, but other bank shares plunged, with the KBW (BKX) Bank index losing over 3%. Sliding oil prices dragged on energy stocks, including Dow components Exxon Mobil (XOM, Fortune 500) and Chevron (CVX, Fortune 500).
Declines were broad based, with 28 of 30 Dow components falling. In addition to the Dow's financial and energy components, other losers included heavily weighted tech stocks Hewlett-Packard (HPQ, Fortune 500) and IBM (IBM, Fortune 500), aerospace and defense names Boeing (BA, Fortune 500) and United Technologies (UTX, Fortune 500) and heavy-machinery maker Caterpillar (CAT, Fortune 500).
Caterpillar shares rallied Monday after the company reported better-than-expected earnings and boosted its 2010 profit forecast.
Market breadth was negative. On the New York Stock Exchange, losers beat winners five to one on volume of 1.68 billion shares. On the Nasdaq, decliners topped advancers by over four to one on volume of 2.77 billion shares.
Economy: On the economic front, investors took in reports on home prices and consumer confidence.
The Case-Shiller 20 city home price index rose 0.6% in February versus a year earlier, the first rise on an annual basis in three years. However, economists surveyed by Briefing.com were expecting a bigger gain of 1.1%. Prices fell 0.7% in January.
Consumer confidence surged in April, according to the Conference Board, with its index rising to 57.9 from 52.3 in March. Economists thought it would rise to 53.5.
Debt commission: Policymakers need to put a plan in place to get spending in line with revenue so as to close the unsustainable fiscal gap threatening the recovery, Federal Reserve Chairman Ben Bernanke said Tuesday.
Bernanke spoke at the first meeting of President Obama's bipartisan debt commission.
Federal Reserve: The central bank policymakers were meeting Tuesday and Wednesday with an announcement on interest rates and the outlook due Wednesday afternoon.
The Ben Bernanke-led Fed is expected to hold interest rates steady at historic lows near zero. However, what the bankers say in the statement about the outlook for the economy and interest rates will be scrutinized.
Investors will also pay attention to whether the Fed provides more details about how it plans to continue unwinding programs put in place to prop up the economy during the financial crisis.
Company news: Ford Motor (F, Fortune 500) reported a better-than-expected first-quarter profit that rose from a year earlier. But shares slumped after the company's revenue growth was shy of expectations.
3M (MMM, Fortune 500) reported higher quarterly sales and earnings that topped estimates thanks largely to strong international sales. The Dow component, considered to be a good barometer of the economy because of the breadth of its business, also boosted its 2010 profit forecast.
However, 3M said growth in Asia and Latin America are the drivers of that forecast and that the U.S. economic recovery will be patchy. Shares gained 0.6%.
Fellow Dow component DuPont (DD, Fortune 500) also reported higher quarterly sales and earnings that topped expectations, and lifted its 2010 profit forecast. But investors took a sell-the-news response and sent shares nearly 4% lower.
With 40% of the S&P 500 having reported, earnings are on track to have grown 50% from a year earlier and revenues 11%, according to the latest info from Thomson Reuters.
Roughly 82% of earnings have topped estimates. Should that figure hold up, it would be the highest percentage of companies topping earnings in Thomson's history.
The dollar and commodities: The dollar gained versus the euro and fell against the yen.
U.S. light crude oil for June delivery fell $1.76 to settle at $82.44 a barrel on the New York Mercantile Exchange.
COMEX gold for June delivery rose $8.20 to settle at $1,162.20 per ounce.
World markets: In overseas trading, European markets slumped, with London's FTSE down 2.6%, France's CAC 40 down 3.8% and Germany's DAX down 2.7%. Asian markets were mixed, with Hong Kong's Hang Seng index down 1.5% and Japan's Nikkei up 0.4%.
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||3.99%||3.96%|
|15 yr fixed||3.16%||3.13%|
|30 yr refi||4.01%||3.98%|
|15 yr refi||3.18%||3.15%|
Today's featured rates:
Irish drug maker Mallinckrodt will have to pay a $100 million fine and allow one of its competitors to produce a life-saving medication used to treat infants. The company hiked the price of the drug from $40 per vial to more than $34,000 per vial over the course of about 15 years. More
Federal Reserve Chair Janet Yellen gave her outlook on monetary policy days before Donald Trump becomes president. More
In 1998, Ntsiki Biyela won a scholarship to study wine making. Now she's about to launch her own brand. More
Navient, formerly part of Sallie Mae, was sued by the CFPB Wednesday for allegedly cheating borrowers out of repayment rights. More