Wall Street's summer rally is on hold as reminders of the economy's weakness give investors reason to take some profits.
Stocks fell moderately Wednesday after an unpleasant reading on the service sector added to investors' growing anxiety over the Labor Department's jobs report, which is due Friday morning. Some pullback is to be expected after a huge rally that sent the Dow Jones industrials and the Standard & Poor's 500 index up 14% in just 16 days.
The Institute for Supply Management said business at service companies was weaker than expected last month. The trade group's services index, a measure of the health of retail, financial services, transportation and health care companies, fell to 46.4 from 47 in June, marking the 10th straight month of declines. A reading below 50 indicates the sector is shrinking.
The disappointing news offset a more upbeat report from the Commerce Department, which said factory orders rose in June for the fourth time in five months. The 0.4% increase came after a 1.1% increase in May. Economists had been expecting a decline of 1%.
Though there have been recent signs of improvement in manufacturing and housing, the market is still worried that rising unemployment will restrain consumers from spending and hinder the economy's recovery. Analysts said Wednesday's slide was natural after such a big jump, especially with caution running high ahead of the jobs report.
"The market has just had a pretty good advance and is looking for a reason for a pullback," said Henry Herrmann, CEO of investment management firm Waddell & Reed.
According to preliminary calculations, the Dow fell 39.22, or 0.4%, to 9,280.97. The S&P 500 index fell 2.95, or 0.3%, to 1,002.70, while the Nasdaq composite index fell 18.26, or 0.9%, to 1,993.05.
About three stocks fell for every two that rose on the New York Mercantile Exchange, where volume came to 1 billion shares.
Treasury prices were mixed. Bond traders seemed little fazed by the Treasury Department's announcement that it plans to auction off $75 billion of three, 10 and 30-year notes next week. Though there have been concerns that the flood of government debt being issued this year to help fund the administration's stimulus programs would outweigh demand, auctions, for the most part, have been going smoothly.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.72% from 3.69% late Tuesday.
The pullback in stocks on Wednesday is a sign of the market's health, analysts said, as building on to gains in an orderly, step-like fashion is more stable than a surge without any breaks. And dips in the market present opportunities for new buyers to step in.
"It would only be natural to hesitate here as it tries to make up its mind as to what the next move will be," said Michael Sheldon, chief market strategist at RDM Financial.
Analysts said the jobs report on Friday is a critical juncture for the market and could set the tone for how stocks trade in the next few weeks.
"The question is, even if it is a little bit strong, will it be enough to support an additional near-term advance in the markets given the run the equities have had over the past several sessions?" Sheldon asked.
Economists expect the report will show the jobless rate rose to 9.6% as employers cut 320,000 jobs last month, better than the 467,000 lost in June.
A private-sector report on unemployment Wednesday offered little encouragement ahead of the government data. The ADP National Employment Report, a closely watched precursor to the Labor Department's report, said employment fell by 371,000 in July — slightly more than anticipated — following a revised decline of 463,000 jobs in June.
The dollar was narrowly mixed against other major currencies.
Light, sweet crude rose 55 cents to settle at $17.97 a barrel on the New York Mercantile Exchange.
Overseas markets fell. European indexes reversed early gains and finished with modest losses. Britain's FTSE 100 fell 0.5%, Germany's DAX index lost 1.2%, and France's CAC-40 shed 0.5%.
Earlier Wednesday, Japan's Nikkei stock average closed down 1.2%.