Stocks fall as traders await Fed's take on economy

NEW YORK -- A recurrence of investors' anxiety about the economy gave Wall Street its biggest loss in five weeks.

The major indexes fell 1% Tuesday as investors feared that the market's steep gains in the past month could unravel if the economy doesn't show more signs of strengthening. Warnings about the health of banks and uneasiness ahead of the Federal Reserve's economic statement Wednesday led investors to dump financial stocks and wade into defensive areas like consumer staples companies and government debt.

Meanwhile, a record 10th straight monthly drop in wholesale inventories brought a fresh reminder that a recovery in the economy is likely to be gradual.

But many analysts said investors aren't panicking. They were taking a much-needed pause following a rally that seemed to be going at breakneck speed. The Standard & Poor's 500 index had reached at its highest level since last fall, rising 15% in just four weeks and 49% from a 12-year low in early March.

"This sort of give-and-take is quite healthy," said Erik Davidson, managing director of investments at Wells Fargo Private Bank in Carmel, Calif. "You're up 50% in five months. That's 10% a month. In quote-unquote normal markets that's five years worth of returns."

Moreover, traders often become jittery when the Fed policymakers meet to discuss interest rates. It is widely expected that the central bank will hold interest rates at their historic low of essentially zero, but investors are waiting to see what the Fed has to say about the economy when the meeting concludes Wednesday.

"It's pretty clear that a lot of people are pulling back any bets pending what is going to happen with the Fed," said Max Bublitz, chief strategist at SCM Advisors in San Francisco.

There were some troubling developments during the day, however. Downbeat comments from analysts about banks weighed on the market. Analyst Richard Bove of Rochdale Securities predicted that bank earnings won't improve for the second half of the year and that many companies will post losses.