Brutal selloff punishes stocks

NEW YORK (CNNMoney.com) -- Stocks slumped Tuesday, with the Dow losing 243 points, as worries about subprime lending, the economy and the weak dollar sparked the second-worst selloff of the year.

The Dow Jones industrial average (down 242.66 to 12,075.96, Charts) and the broader S&P 500 (down 28.65 to 1,377.95, Charts) index both lost about 2 percent. The tech-heavy Nasdaq (down 51.72 to 2,350.57, Charts) composite sank over 2 percent and the Russell 2000 (down 19.88 to 769.12, Charts) small-cap index tumbled 2.5 percent.

Treasury prices jumped as investors sought safety. The advance sent the 10-year note yield down below 4.5 percent. Bond prices and yields move in opposite directions.

Meanwhile, the dollar tumbled versus other major currencies.

Wednesday brings earnings from Lehman Brothers (Charts) and the weekly oil inventories report. Reports are due later in the week on producer and consumer prices, manufacturing and consumer sentiment.

"Clearly, the issues for subprime are having an impact on the broader market," said Richard Hoyt, portfolio manager at KDV Wealth Management. "The market is a combination of fundamentals and psychology and right now, psychology has the upper hand," he added.

Worries about subprime mortgage lenders dominated trading after New Century Financial (Charts) said the SEC has subpoenaed documents in an accounting probe. And the New York Stock Exchange suspended the company's stock and is having it delisted.

New Century's problems caused a broad selloff among subprime lenders, who have seen an alarming rise in defaults on loans to their customers - home buyers with less than top credit. Investors are worried that problems in the sector will hurt not only subprime lenders but also the broader housing market and economy.

Also in focus: a surprisingly weak read on retail sales and more nervous buying of the yen. After seesawing over the last week, the yen surged as investors closed out so-called carry trades - bets on riskier assets bought by borrowing in countries with low interest rates, like Japan.

The factors driving stocks lower were the same ones that caused the big selloff two weeks ago, said Barry Hyman, equity strategist at EKN Financial services.

On that day, the Dow plunged 416 points - the biggest one-day point drop since the day the market reopened after the Sept. 11 attacks.

"I think it's hard to put aside that big drop in the market and the reasons behind it," he said. "Again, selling is being driven by worries about the subprime contagion and the weak carry trade."

Tuesday's weak retail sales report - the latest in a string of sluggish economic data - revived fears about the economy slowing abruptly, and possibly falling into recession, Hyman said.

On Feb. 27, the day of the big selloff, the Dow hit a trading low of 12,086.06 before closing a little higher. It declined on and off for the next few days before hitting a low on March 5 of 12,039.11.

On Tuesday, the Dow closed near its low of 12,071 before bouncing back a bit just before the close.

In addition to New Century's woes, fellow subprime Accredited Home Lenders (down $7.43 to $3.97, Charts) said Tuesday it has to raise new funds to avoid defaulting on its loans. The stock plunged 65 percent in active trading. Rivals Fremont General (down $0.55 to $6.18, Charts) and Novastar Financial (down $0.81 to $3.43, Charts) both sank too.

Countrywide Financial (down $1.65 to $33.49, Charts), the largest U.S. mortgage lender, slipped for a second session after it said Monday that a jump in foreclosures and problems with subprime lending could weigh on earnings going forward.

Washington Mutual (down $2.11 to $39.79, Charts) slipped 5 on worries that its earnings will be negatively impacted by its exposure to the subprime market.

The subprime worries overshadowed strong earnings from Goldman Sachs (down $3.57 to $199.03, Charts). The investment bank reported earnings that rose from a year earlier and topped estimates, but its stock declined.

A variety of other financial stocks also fell, including Dow components JP Morgan (down $2.14 to $46.70, Charts), Citigroup (down $1.61 to $48.75, Charts) and American Express (down $1.96 to $54.75, Charts).

Declines were broad based, with 29 out of 30 Dow issues falling. The lone gainer was AT&T (up $0.20 to $37.26, Charts), which rose 0.5 percent.

In other news, Viacom (down $0.05 to $39.50, Charts) said it's suing Google (down $11.72 to $443.03, Charts) and its video sharing site YouTube for more than $1 billion regarding unauthorized use of its copyrighted programs.

Texas Instruments (down $0.85 to $31.74, Charts) slipped after the chipmaker issued its mid-quarter update late Monday, narrowing its forecast range for both revenue and earnings, but keeping the midpoint unchanged.

On the upside, Qualcomm (up $1.71 to $41.83, Charts) shares gained after the wireless chipmaker boosted its outlook for the second quarter.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than four to one on volume of 1.96 billion shares. On the Nasdaq, decliners topped winners by almost five to one on volume of 2.20 billion shares.

Also a factor in the day's selling: February retail sales, which rose a smaller-than-expected 0.1 percent. Sales excluding autos fell 0.1 percent, versus forecasts for a rise. A separate report showed that January business inventories rose 0.2 percent, as expected.

U.S. light crude oil for April delivery fell 98 cents to $57.93 a barrel on the New York Mercantile Exchange, giving up earlier gains.

Treasury prices rose, lowering the yield on the 10-year note to 4.49 percent from 4.55 percent late Monday.

In currency trading, the dollar fell versus the euro and the yen. COMEX gold for April delivery fell 90 cents to settle at $649.40 an ounce.

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