NEW YORK -The problem with rising expectations is they get tougher to beat.
Investors broke the stock market's four-day rally and sold off after data on the services industry and factory orders came in below forecasts. Factory orders actually rose in April, but the report disappointed investors who anticipated a larger increase.
The Dow Jones industrial average fell almost 66 points, or 0.8 percent, while the Standard & Poor's 500 index fell 1.4 percent. The Nasdaq composite index, which has been outperforming the other indicators this year, fell just 0.6 percent.
Optimism about the economy stabilizing has lifted the Dow 32.5 percent from its 12-year low reached in early March. Over those three months, topping investors' expectations meant clearing a relatively low bar.
Alan Gayle, senior investment strategist at RidgeWorth Capital Management, said he began increasing his stock holdings in March on signs that economic data was becoming "less bad."
Now, Gayle said, "'less bad' is not good enough."
Even Federal Reserve Chairman Ben Bernanke was no longer emphasizing signs of economic stabilization on Wednesday, as he has done in recent months. In testimony to Congress, Bernanke focused instead on the government's growing debt load, saying that failing to ease the deficit could undermine efforts to revitalize the economy.
In the last hour of trading, however, some traders bought back into the stock market to take advantage of reduced prices, said Ryan Larson, senior equity trader at Voyageur Asset Management. It's the tactic known as bargain hunting, or "buying the dips," and the move signaled that many market participants still believe the rally has legs.
"At some point, it's hard to fight the trend, and the trend over the last couple of months has been up," Larson said. "People don't want to be left out."
The Dow fell 65.63, or 0.8 percent, to 8,675.24. The Standard & Poor's 500 index fell 12.98, or 1.4 percent, to 931.76. The Nasdaq composite index fell 10.88, or 0.6 percent, to 1,825.92.
The S&P 500 index and Nasdaq pulled back from their highest levels so far this year, reached Tuesday. Both the S&P and Nasdaq are still up for the year, but the Dow has yet to break back into positive territory for 2009. It got within 35 points, or 0.4 percent, of that break-even point on Tuesday.
There were more than twice as many losing stocks as winners on the New York Stock Exchange Wednesday, where volume amounted to 1.3 billion shares, down from 1.4 billion a day earlier.
Some of the biggest declines were in energy, industrial and material stocks ― all areas that have benefited in recent days from gains in oil and commodity prices.
Oil prices pulled back sharply Wednesday after a weeklong rally as the government reported a big jump in crude storage levels, signaling continued weak demand.
As crude shed $2.43 to finish at $66.12 a barrel on the New York Mercantile Exchange, Valero Energy Corp. sank $3.98, or 17.8 percent, to $18.40, and Sunoco Inc. dropped $2.27, or 7.5 percent, to $28.03.
Investors in both stocks and energy were displeased with the Commerce Department report showing a smaller-than-expected rise in factory orders. Though it was the second gain in the past three months, orders rose just 0.7 percent in April when analysts had called for a 0.9 percent increase.
Also, the Institute for Supply Management, a trade group of purchasing executives, said the services sector shrank in May at the slowest pace since October. The barometer was below economists' estimates and marked the eighth straight monthly decline.
The rally's staying power will face further tests this week as retailers report May sales results Thursday and as the Labor Department releases its monthly jobs report on Friday. The jobs report is one of the most closely watched indicators of the economy's health.
Matt King, chief investment officer of Oakland, Calif.-based Bell Investment Advisors, said the market's dips are an opportunity for investors to increase their stock holdings.
"We're trying to caution people that just because the market pulls back doesn't mean we're heading back to the bottom," he said.
Still, analysts are keeping a close eye on rising Treasury yields and a weakening dollar. Investors are concerned those factors, largely an outcome of the government's massive stimulus efforts and the improved outlook on the economy, could also hinder a robust recovery.
Rising yields could lead to higher interest rates on mortgages and other types of consumer loans to which they are linked, while a falling dollar could trigger inflation and restrict the buying power of consumers.
On Wednesday, however, both Treasurys and the dollar rebounded.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, slipped to 3.54 percent from 3.62 percent. Last week, the 10-year yield surged to a six-month high of 3.75 percent.
The dollar gained ground against the euro and the British pound, while gold prices sank.
The Russell 2000 index of smaller companies fell 3.92, or 0.7 percent, to 522.71.
Overseas, Japan's Nikkei stock average added 0.4 percent, Britain's FTSE 100 fell 2.1 percent, Germany's DAX index fell 1.7 percent, and France's CAC-40 fell 2.0
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