A disappointing report on housing starts made investors nervous about the US economy yesterday and sent stocks lower even as profits at many companies exceed expectations.
Stocks fell from 2009 highs after the US Commerce Department said home building rose less than expected in September, a discouraging signal for future construction activity.
The market will get another measure of the housing market's health on Friday with a report on existing home sales.
After several months of encouraging data on housing, investors have become disappointed in recent weeks with signs that a recovery in home-building and home sales is starting to falter, which could bode poorly for the broader economy.
A rebound in the dollar from a 14-month low against other major currencies also hurt stocks by driving down commodity prices and, in turn, hurting energy and materials companies.
The housing data and the stronger dollar overshadowed strong earnings reports from Apple, Caterpillar and health insurer UnitedHealth Group.
There was more trouble for stocks from a Labor Department report finding that energy prices pushed US wholesale prices lower in September, leaving a larger-than-expected monthly drop in the producer price index. That report helped lift the bond market, which tends to rise on signs of muted inflation and slow economic growth.
But Schaeffer's Investment Research analyst Todd Salamone said the market's ability to avoid a big slide is an encouraging sign.
He said: "We've got a report that's disappointing and the bears haven't really gained control here. It's a good excuse just to take a breather."
The Dow Jones industrial average fell 50.71, or 0.5%, to 10,041.48.
The broader Standard & Poor's 500 index fell 6.85, or 0.6%, to 1,091.06, and the Nasdaq composite index fell 12.85, or 0.6%, to 2,163.47.
Treasury prices rose, pushing their yields lower, after the drop in producer prices.
Inflation is a worry for bond investors because rising prices can eat into returns. The yield on the 10-year Treasury note fell to 3.34% from 3.39% late yesterday.
The dollar and gold rose. Crude oil lost ground for the first time in a week, falling 52 cents to settle at 79.09 dollars a barrel on the New York Mercantile Exchange. Oil rose to 80.05 dollars during the day, its highest level in a year.
The day's slide came as investors navigate a busy week of corporate earnings reports for signals about the economy.
Profits have topped expectations but many companies have relied on slashing costs to boost profits as they did in the first half of the year. That has some analysts worried.
Dan Cook, senior market analyst at IG Markets in Chicago, is concerned that companies are not bringing in more revenue. He noted that reducing costs by laying off workers adds to the problems facing the overall economy.
"We call it cost-cutting because that's kind of the nice term, but in reality a lot of those are consumers," he said.
Cook said companies will not be able to keep coming up with earnings that top expectations if improved profits do not translate to a stronger economy.
"Right now we're on a divergent path," he said, referring to earnings and the economy. "It's only a matter of time before that has to catch up."
Russell Croft, portfolio manager at Croft Leominster Investment Management in Baltimore, contends that for now, any improvement in profits are good.
"In these tough times any kind of earnings power that these companies are talking about, whether it's revenue growth or cost-cutting - we're happy about it," he said.
Apple reported much stronger profits after the markets closed yesterday, citing big gains in sales of iPhones and Mac computers. Texas Instruments' results came in above the improved forecast the chip maker issued last month.
Apple closed up 8.90 dollars, or 4.7%, at 198.76 dollars, after trading at a 12-month high of 201.75 dollars. Texas Instruments rose 14 cents to 23.66 dollars.
Caterpillar rose 1.76 dollars, or 3%, to 59.61 dollars, while UnitedHealth Group jumped 1.04 dollars, or 4.2%, to 25.96 dollars.
Two stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.2 billion shares compared with 1.1 billion yesterday.
The Russell 2000 index of smaller companies fell 8.93, or 1.4%, to 613.41.