Stocks tumbled Monday in light trading volume, but the pullback nonetheless was another sign that the market's spring rally has stalled .
The Dow Jones industrials fell 187 points, their biggest drop since April 20, as all the major market indexes fell more than 2%.
The slide began in Asia and Europe and spread to the U.S. as a strong dollar pushed commodities prices sharply lower. Stocks of energy and materials producers have been lifting the market in the past month so the drop in prices left stocks without an important leg of support.
Meanwhile, new worries about the economy emerged after an index of manufacturing in New York indicated that demand weakened in June. The weaker report from the Federal Reserve Bank of New York ran counter to the gradual improvement traders have grown accustomed to with other economic readings.
Analysts said stocks are also losing ground because investors are questioning what it will take to move the market higher. Ahead of Monday's slide, the S&P 500 had jumped 39.9% since skidding to a 12-year low on March 9. Investors have been betting on an economic recovery but questions about how long that might take are poking holes in the rally.
The unease about the economy's recovery have kept stocks from rising as quickly in recent weeks as they did in March and April. The Dow and the S&P 500 index are up 12 of the past 14 weeks, and the last four straight weeks. But traders are having a harder time wringing advances from stocks as questions remain about whether unemployment, still-weak home prices and inflation will trip up a resurgence in the economy.
Harry Rady, chief executive of Rady Asset Management, said stocks have risen too fast given how troubled the economy remains. "The market just seems to keep driving the car into the wall and then wonders why it can't keep driving," Rady said.
The Dow fell 187.13, or 2.1%, to 8,612.13, and returned to a loss for the year. The broader Standard & Poor's 500 index fell 22.49, or 2.4%, to 923.72, and the Nasdaq composite index fell 42.42, or 2.3%, to 1,816.38. Both indexes still are showing a gain for 2009.
Overseas trading was influenced by the dollar, which rose against most other major currencies following weekend comments from Russia's finance minister, Alexei Kudrin, that the greenback likely would remain the world's reserve currency.
Investors have been worried in recent weeks that foreign governments would seek to spread their reserve cash holdings beyond the dollar. That would cut into demand for the currency.
Commodities including oil tend to be a hedge against a weak dollar. So, when the greenback is stronger, investors feel less need to protect themselves against it and they start selling commodities. That in turn tends to pull down the stocks of basic materials producers who profit from higher prices.
Overseas, Japan's Nikkei average lost 1%, while Britain's FTSE 100 fell 2.6%, Germany's DAX fell 3.5% and France's CAC-40 lost 3.2%.
Bond prices mostly rose, driving yields down. The yield on the benchmark 10-year Treasury note, a benchmark widely used for setting home mortgage rates, fell to 3.72% from 3.80% late Friday.
The dollar's rise helped send oil prices lower. Light, sweet crude fell $1.42 to settle at $70.62 per barrel on the New York Mercantile Exchange.
Investors often welcome falling commodities prices because the lower costs will have benefits across the economy. But traders have also been looking for gains in commodities because that could signal resources are becoming more scarce as demand improves.
Commodities producers fell Monday. Aluminum maker Alcoa and Freeport-McMoRan Copper & Gold slid. Alcoa fell 78 cents, or 6.5%, to $11.21, while Freeport-McMoRan fell $3.37, or 5.8%, to $55.14.
In corporate news, Goldman Sachs lowered its rating on Wal-Mart Stores to "Neutral" from "Buy," seeing few catalysts that could push the stock higher. The retailer fell $1.38, or 2.8%, to $48.46.
Nick Kalivas, vice president of financial research at MF Global, said traders are cautious ahead of quarterly earnings reports this week from Best Buy, FedEx and BlackBerry maker Research in Motion, all of which are important in their industries.
"It might keep us sideways or lower if we can't get some good news from some of these numbers," he said.
Investors are also getting more specifics on Washington's plans for the biggest overhaul of the financial system since the Great Depression. Among the proposals, the Federal Reserve would have authority over the largest financial institutions whose failure could jeopardize the entire financial system.
Treasury Secretary Timothy Geithner and President Obama's chief economic adviser, Lawrence Summers, outlined the White House proposal in an article Monday in The Washington Post.
Trading volume remained light Monday, as it has been for weeks. That indicates fewer traders are standing behind the market's moves. Volume does tend to slow in the summer as traders take vacations, but thin volume could indicate there is less conviction behind the market's moves.
About eight stocks fell for every one that rose on the New York Stock Exchange, where volume came to a light 4.55 billion shares, up from Friday's 4.39 billion.
In other trading, the Russell 2000 index of smaller companies fell 15.00, or 2.9%, to 511.83.