Two key economic reports indicated that the economy is still struggling. As expected, the Institute for Supply Management's manufacturing index for May showed its fourth straight monthly decline, while the Commerce Department said construction spending dipped in April for the sixth time in seven months due to a drop in home building.
The market drew no comfort from the ailing financial sector, either. As the financial system still contends with the aftermath of the nation's prolonged credit problems, Wachovia Corp. Chief Executive Ken Thompson was forced out Monday, and Washington Mutual Inc. is taking the chairman role away from chief executive Kerry Killinger. Thompson has become the third CEO of a major U.S. financial institution to lose the top job as a result of the credit crisis.
In addition, British lender Bradford & Bingley issued a poor financial outlook and said it is selling a 23 percent stake to a private equity firm, while the ratings agency Standard & Poor's Corp. downgraded Merrill Lynch & Co., Morgan Stanley and Lehman Brothers Holdings Inc. and revised Banc of America Corp. and JPMorgan Chase & Co.'s outlooks to negative.
S&P's review of the financial sector suggested there could be more write-downs coming, though likely not as large as in recent quarters, and "further sharp deterioration" in mortgage loan portfolios and residential construction."
Brian Gendreau, investment strategist for ING Investment Management, said the markets have been "hypersensitive about anything to do with credit" in recent months, and the combination of the S&P cuts, the bank news and comments in an overseas speech by U.S. Treasury Secretary Henry Paulson weighed on the market.
"Basically, he suggested that there were further problems to come in the banking and financial sector," Gendreau said. "That's just toxic for stocks."
The retreat follows a pattern in the past month where investors, looking to ignite a rally, quickly back-pedal with any hint of bad economic or corporate news. One such spoiler has been the record pace of oil prices, which has not given investors much respite. After slipping last week, light, sweet crude for July delivery rose 41 cents to settle at $127.76 a barrel on the New York Mercantile Exchange.
The Dow Jones industrial average fell 134.50, or 1.06 percent, to 12,503.82, after gaining last week on better-than-expected economic data and a pullback in oil prices. The blue chip index had shed more than 200 points during the session.
Broader stock indicators also dropped Monday. The S&P 500 index fell 14.71, or 1.05 percent, to 1,385.67. The Nasdaq composite index fell 31.13, or 1.23 percent, to 2,491.53.
Government bonds rose as stocks pulled back. The 10-year Treasury note's yield, which moves opposite its price, fell to 3.97 percent from 4.06 percent late Friday. The yield was unchanged in late trading.
High energy costs have been hurting both companies and consumers, who still face falling home prices. Real estate data company Radar Logic said Monday that only one of the 25 metropolitan areas it tracks, Milwaukee, saw a rise in real estate values in March.
Paulson, during a speech in Abu Dhabi, said there are no "quick remedies" for rising energy prices, which he attributed to high demand and limited supplies. Paulson also said the housing and capital markets are working through their issues, but he expects that process to continue "for some time."
In its manufacturing data Monday, the ISM said commodity prices for the manufacturing sector rose at a faster rate in May than in April.
After announcing its CEO's departure, Wachovia shares closed down 37 cents at $23.43 after earlier falling to $22.72, their lowest point since 1995. WaMu fell 5 cents to $8.97.
Lehman fell $2.98, or 8.1 percent, to $33.83. Morgan Stanley lost $1.13, or 2.6 percent to $43.10 and Merrill fell $1.30, or 3 percent, to $42.62.
And weighing on the Nasdaq, shares of ImClone Systems Inc. fell $2.64, or 6.1 percent, to $40.94 on disappointment over trial data for its drug Erbitux as a treatment for lung cancer and colorectal cancer.
Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where consolidated volume was 3.59 billion shares, compared to 3.72 billion on Friday.
The Russell 2000 index of smaller companies fell 7.26, or 0.97 percent, to 741.02.
The dollar was mixed against other major currencies, while gold prices edged higher.
Overseas, Japan's Nikkei stock average closed up 0.71 percent. Britain's FTSE 100 fell 0.76 percent, Germany's DAX index fell 1.24 percent, and France's CAC-40 fell 1.58 percent.
