Wall Street Ends In the Red

Stocks sell off on weak housing data and a negative view of the Fed's beige book.
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Updated from 4:16 p.m. EDT

Stocks in the U.S. pulled back Wednesday as negativity about the housing market and the

Federal Reserve's

latest economic report put an end to a two-day rally for the

Dow Jones Industrial Average

.

The Dow lost 143.39 points, or 1.07%, to 13,305.47, as only three of the average's 30 components finished with gains.

General Motors

(GM) - Get Report

,

Citigroup

(C) - Get Report

and

JPMorgan Chase

(JPM) - Get Report

were among the worst performers.

The

S&P 500

was down 17.13 points, or 1.15%, at 1472.29, and the

Nasdaq Composite

was off 24.29 points, or 0.92%, at 2605.95.

Part of what pinned the market in the red was the 2 p.m. EDT release of the Fed's regional business survey, known as the beige book.

Economic activity continued to expand in most of the nation's 12 districts at a modest or moderate pace in August, the Fed said. Growth slowed, however, in the Philadelphia, Richmond, Dallas and San Francisco regions.

The recent problems in the financial markets were emphasized, with the credit crisis having a dampening effect on the housing sector. Still, the report indicated that much of the trouble had been contained, leaving traders concerned that the Fed might not be moved to cut interest rates.

"Most

banks reported that the recent developments in financial markets had led to tighter lending standards for residential mortgages, which was having a noticeable effect on housing activity, and several noted that the reduction in credit availability added to uncertainty about when the housing market might turn around," the survey read.

"Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited."

Michael Sheldon, chief market strategist with Spencer Clarke LLC, said that the beige book "is an example of a situation where good news is bad news.

"Comments from the beige book indicate that outside of housing and real estate, Fed districts did not see much of the way in spillover to the broader economy," he said. "As a result of more positive-than-expected comments, the market continued to sell off on reduced expectations for the next Fed meeting."

While the beige book did show signs of credit-related worry in the Fed's districts, some of the sting was curtailed already. Last week, Fed Chairman Ben Bernanke delivered a speech on the recent housing and credit problems, and he said the central bank is taking very seriously the threats to economic growth.

"Economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation," Bernanke said. "We will pay particularly close attention to the timeliest indicators."

Prior to the beige book release, stocks had already been tumbling after the National Association of Realtors said its pending home sales index dropped 12.2% in July to a reading of 89.9, providing the latest evidence that the slowdown in housing is continuing.

The decline follows a 5% rise in June. Over the last year, the index has fallen 16.1%.

Ian Shepherdson, chief economist with High Frequency Economics, said that July's swoon in pending home sales offers conclusive proof that June's unexpected leap was a fluke.

"Note that this collapse in pending home sales predates the turmoil in the markets and the subsequent jump in jumbo mortgage rates, even for prime borrowers," Shepherdson said. "Accordingly, we expect the index to drop further over the next few months. This is disastrous."

The Philadelphia Housing Sector Index slid 3.2%.

D.R. Horton

(DHI) - Get Report

,

Hovnanian

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,

Lennar

(LEN) - Get Report

and

Pulte Homes

(PHM) - Get Report

were all down 2.8% or more.

The latest data arrived just two days ahead of the closely watched jobs report. The Labor Department is expected to say at the end of this week that the U.S. economy added 120,000 jobs in August, compared to an increase of 92,000 in July.

"Bernanke has already set the stage for an interest rate cut, but the real question will be whether its by 25 basis points or 50," said Peter Cardillo, chief market economist with Avalon Partners. Weak economic numbers will probably determine what the Fed does. The core rate of inflation is near their comfort zone, which works in the favor of an interest rate cut."

Meanwhile, the Organization for Economic Cooperation and Development cut its anticipated growth for both the U.S. and Europe, citing the tribulations of the mortgage-securities market. The group is now looking for a 1.9% U.S. expansion, down from its prior outlook of 2.1%. Europe's forecast was lowered to 2.6% growth from 2.7%.

At the same time, the European Central Bank might take action Thursday if it sees the need to calm the money markets.

On Tuesday, investors returned from a long holiday weekend on this side of the Atlantic and put their money to work. Gains in

Yahoo!

(YHOO)

,

Apple

(AAPL) - Get Report

, and other big tech names led the market to the upside.

The Dow ended ahead by 91.12 points, or 0.68%, at 13,448.86. The Dow added 1.6% over the previous two sessions. The S&P 500 advanced 15.43 points, or 1.05%, at 1489.42. The tech-heavy Nasdaq surged 33.88 points, or 1.3%, to 2630.24 for its fourth straight win.

Volume was greater than Tuesday's session while breadth turned negative. On the

New York Stock Exchange

, 2.98 billion shares changed hands as decliners topped advancers by an 8-to-3 margin. Volume on the Nasdaq reached 1.96 billion shares, with winners outpacing losers nearly 2 to 1.

Treasury securities rallied. The 10-year note rose 19/32 in price, cutting the yield to 4.47%. The 30-year bond added 29/32 in price, yielding 4.77%.

Among equities, toymaker

Mattel

(MAT) - Get Report

initiated a third recall of Chinese-made toys due to lead paint. In all, 800,000 toys were included in the current recall, in addition to the millions covered by two previous actions. After spending most of the session in negative territory, Mattel finished with a penny gain at $21.98.

During the session, Apple unveiled a complete refresh to its line of iPod products and cut prices on its heavily hyped iPhone. Shares of Apple had jumped more than 13% over the last week in anticipation of the iPod redesign. Following the announcement, though, shares slid $7.40, or 5.1%, to close at $136.76.

Financial stocks had a tough time after Lehman Brothers downgraded

Deutsche Bank

(DB) - Get Report

and

Credit Suisse

(CS) - Get Report

to underweight and equal-weight, respectively. Deutsche slid 1.9% to $125.92, and Credit Suisse ended down 1.7% at $66.22.

Merrill Lynch raised its long-term price forecasts for aluminum, nickel and iron ore. The firm also upgraded

Alcoa

(AA) - Get Report

and a few other metal stocks to buy. Alcoa tacked on 7 cents, or 0.2%, to $36.48.

Elsewhere, the October front-month crude contract added 65 cents at $75.73 a barrel.

Overseas markets were mostly lower. Japan's Nikkei 225 slid 1.6% overnight, and both London's FTSE 100 and Germany's Xetra Dax lost 1.7%. Hong Kong's Hang Seng rose 0.8%.