NEW YORK (CNNMoney.com) -- Stocks recovered from deep losses posted earlier in the session but ended lower Wednesday, as investors welcomed the Fed's forecast of an improving economy amid lingering fears about the global economy.
The Dow Jones industrial average (INDU) finished 67 points lower, or 0.6%. Earlier, the index dropped 150 points. Industrial stocks led the decline, with shares of Caterpillar (CAT, Fortune 500) and Boeing (BA, Fortune 500) falling more than 2%.
The S&P 500 (SPX) lost 6 points, or 0.5%. The broad index also slid as much as 20 points to hit an intraday low of 1100.66. Investors will keep a close eye on 1,100, a key psychological level. If the index breaks below that level, it could trigger further selling or may wind up bringing money back into the market.
The Nasdaq composite (COMP) slipped 19 points, or 0.8%. Earlier in the session, the tech heavy index fell more than 1%.
Stocks had tumbled Tuesday as investors shrugged off better-than-expected earnings from U.S. retailers and remained focused on European debt problems after the euro hit a four-year low against the dollar.
The euro zone's fiscal troubles remained in the spotlight for most of Wednesday following Germany's announcement that it will ban 'naked' short selling. But the Fed's minutes released later in afternoon lifted the central bank's outlook for the economy, and in turn boosted investor confidence and prompted U.S. stocks to regain some ground.
The earlier pullback also allowed investors who were waiting on the sidelines to get back in the game, said Dave Hinnenkamp, chief executive of KDV Wealth Management.
While fear and uncertainty will continue to drag on markets in the near future, analysts expect a steady turnaround to take hold in the second half of the year as investors shift more attention to the strength in the U.S. economy.
"Even with Europe's problems impacting the worldwide recovery, the economic strength we've seen here has been overshadowed," Hinnenkamp said. "We've been getting a bevy of good news in corporate earnings reports and forecasts."
Earlier in the day, declines in the market were exacerbated by Germany's announcement curbing trading practices.
"There's no question that Europe's austerity measures will impact global economic activity, but the German ban raises even more questions," said Peter Cardillo, chief market economist at Avalon Partners.
Cardillo said Germany's inclusion of financial firms in the restrictions has investors on edge that serious problems are developing within those institutions.
German trading ban: Late Tuesday, Germany's financial regulator issued a ban on naked short sales of euro zone debt and the the country's 10 leading financial firms.
Traditional short sellers borrow a security and buy it back later a lower price, hoping to pocket the difference.
In a "naked" short sale, however, investors sell the investment without ever borrowing the shares or bonds, making it much easier to drive down their value.
Regulator BaFin said the ban will apply until March 31, 2011.
World markets: European shares also took a hit, with Germany's DAX and France's CAC finishing 2.9% lower. The FTSE 100 in Britain slipped 2.8%,
The German trading ban also sparked jitters in Asia, where Hong Kong's Hang Seng sank 1.8% and Japan's Nikkei finished the session 0.5% lower.
Economy: The Labor Department said its consumer price index slipped 0.1% in April on a monthly basis, but climbed 2.2% compared to a year earlier. Still, that's the smallest annual increase since January 1966.
The government's report showed that core CPI, which excludes volatile food and fuel prices, held steady with March's figures and rose 0.9% on an annual basis.
Economists had expected the CPI and core CPI to edge up 0.1%, according to a consensus forecast from Briefing.com.
A report from the Mortgage Banker Association showed that a record 10.06% of borrowers were behind on the payments during the first quarter of 2010.
Investors also took in minutes from the Federal Reserve's latest policy meeting. The central bank improved its outlook for economic growth this year and decreased its forecast for the unemployment rate.
Wall Street reform: Senators in favor of the financial reform bill failed to muster enough votes to end debate on the legislation in a crucial test vote on Wednesday afternoon.
Proponents were shy 3 of the 60 votes needed to pass the test, which intended to set up the bill for a final vote by the end of the week.
Companies: Target (TGT, Fortune 500) reported Wednesday that its quarterly profit rose 28% to $671 million from a year ago. The retailer's earnings per share of 90 cents missed analysts' expectations of 91 cents per share. Target's stock ended 0.4% lower.
Dollar and commodities: The dollar fell 1.6% against the euro after the shared currency eased off a four-year low hit Tuesday. But while the euro is clawing back up, Cardillo said it is only enjoying a relief rally and further declines are expected.
The greenback also turned lower against the British pound, sliding 0.6%, and the buck declined 0.7% versus the Japanese yen.
U.S. light crude oil sank to a 7-month low below $68 a barrel earlier Wednesday, before regaining losses to settle 46 cents higher at $68.87.
Gold for June delivery fell $21.50 to settle at $1,193.10 per ounce.
Bonds: Treasury prices ended lower. The 10-year note's yield rose to 3.37%. Treasury prices and yields move in opposite directions.
Market breadth was negative. On the New York Stock Exchange, losers beat winners by almost four to one on volume of 1.6 billion shares. On the Nasdaq, decliners beat advancers three to one on volume of 2.6 billion shares.
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||4.17%||4.11%|
|15 yr fixed||3.19%||3.16%|
|30 yr refi||4.19%||4.12%|
|15 yr refi||3.21%||3.19%|
Today's featured rates:
Puerto Rico's governor called on Washington to change federal bankruptcy laws to help the island get out from its debts. More
The Facebook tool for turning profile photos into rainbows went viral over Pride weekend. More
Richard Branson picked these three businesses as his favorite in the final of the "Pitch to Rich" competition. More
An estimated 5 million more salaried workers may soon become automatically eligible for overtime pay, thanks to a pending federal rule change. More