The Dow Jones Industrial Average lost 185.65 points, or 1.96%, to 9310.60, while the S&P 500 gave up 22.58 points, or 2.2%, to 998.04. The Nasdaq Composite fell 40.17 points, or 2%, to 1968.89.
The day's economic data were promising, observers agree. But what wasn't promising was that stocks sold off on seemingly good news.
"I think we're seeing a fear factor that we're in the first day of September -- the worst month of the year for equities -- and of course, the fact that everyone is talking about a correction certainly is weighing on the market," says Peter Cardillo, chief market economist at Avalon Partners. "There's been light volume, so it's very easy to make a case for buying the rumor and selling on the fact, and this market has already discounted that the economy is moving out of a recession."
One thing that market observers agree on is that the day's data gave a promising picture of the economic recovery.
The Institute for Supply Management's manufacturing index increased to 52.9, from 48.9, marking a shift from contraction to expansion and topping expectations for a lesser increase to 50.5.
"You've got strong export volumes, and at the same time U.S. businesses have been driving inventories down significantly, so that's being reflected in this improvement we're seeing in manufacturing," says Phil Orlando, chief equity market strategist at Federated Investors. "This is not a surprise to us," he says, "that's been priced in."
Those data did cause a brief U-turn in oil prices, but crude fell back again, and ultimately lost $1.91 to $68.68.
Also Tuesday, the National Association of Realtors said the pending home sales index, which tracks contract activity, increased for the sixth straight month by 3.2% to 97.6 in July -- its highest level since June 2007.
Elsewhere, construction spending fell 0.2% in July after an 0.1% rise the month prior and vs. expectations for no change.
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