Fed Spoils New Year's Party

The markets had initially rallied on news that the Institute for Supply Management's manufacturing index crossed back into growth territory with a higher-than-expected 51.4 reading for December. The index had fallen to 49.5 in November, its first contraction since 2003, which unnerved the markets.

When stocks pared their gains, the sectors that suffered the most were economically sensitive energy and materials stocks, and interest-rate-sensitive homebuilders.

Energy stocks tumbled as the price of oil plunged 4% to $58.61 per barrel and land driller Nabors Industries(NBR Quote) sharply cut its fourth-quarter forecasts.

Nabors dropped 5.8%; Exxon Mobil(XOM Quote), Halliburton(HAL Quote), Chesapeake Energy (CHK Quote), Weatherford International (WFT Quote) and ConocoPhillips (COP Quote) were among the other energy names hit hard. The Oil Services HOLDRs(OIH Quote) exchange-traded fund fell 4.5%, while the Energy Select Sector SPDRs(XLE Quote) fell 3.5%.

Shares of metals miners also were hit as copper fell more than 7% on the day, while gold dropped $8.20 on the day, after swinging by almost $20 intraday. Shares of Freeport McMoRan(FCX Quote) and Phelps Dodge(PD Quote) fell 9.4% and 3.12%, respectively.

The homebuilders were off throughout the day on news of earnings warnings from Lennar(LEN Quote). Lennar CEO Stuart Miller contradicted some competitors' recent declarations, saying that "we have not yet seen tangible evidence of a market recovery." Shares of Lennar fell 3.5%, while the Philadelphia Housing Sector Index fell 1.4%.

Elsewhere, home-improvement retailer Home Depot(HD Quote) gained 2.3% Wednesday on news that CEO Robert Nardelli left his post. Shares of mega-retailer Wal-Mart(WMT Quote) also jumped 3% on its stronger-than-expected report of December same-store sales.

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