NEW YORK — A stock market ripe for a big pullback succumbed Tuesday, plunging when rumors of a bank failure revived investors’ anxiety about the banking industry and the economy as a whole.
A batch of economic reports that just weren’t good enough added to the mix as the major indexes all fell about 2 percent and the Dow Jones industrials slid 186 points. Treasury prices, usually the beneficiary of a slide in stocks, ended only moderately higher.
A break in the market’s six-month rally was widely expected after investors showed a growing inclination to sell for some time.
While the major indexes finished August with respectable gains, including a 3.4 percent rise in the Standard & Poor’s 500, trading was erratic and the advances had a half-hearted feeling. Analysts warned that investors were doubting whether they should have bid stocks so high in the rally, which began in early March.
So it wasn’t surprising that, after the Dow was up 60 points in response to a seemingly better-than-expected reading on manufacturing, a rumor about a possible bank failure could take the market down.
“Sometime midmorning, rumors came out that a large bank could be in trouble,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. “That’s all it takes to spook this market.”
The rumors were never substantiated.
The Dow’s drop virtually equaled a 186-point slide two weeks ago that the market later recovered from, sending stocks to their highest levels in almost 10 months.
Dan Deming, a trader with Strutland Equities in Chicago, said it didn’t appear much had changed in the market since then, but investors have grown more nervous as stocks have pushed higher, and that was enough to set off heavy selling.
“It’s really more psychological right now than anything. The first day of September — the market shows some weakness, and then it just kind of starts to feed on itself,” he said. “Everybody is kind of looking over their shoulder.”
The Dow dropped 185.68, or 2 percent, to 9,310.60. The index is down 270 points, or 2.8 percent, since Friday, its biggest drop over three days since July 7, when it lost 341 points.
The S&P 500 fell 22.58, or 2.2 percent, to 998.04, while the Nasdaq composite fell 40.17, or 2 percent, to 1,968.89.
The day’s retreat was broad:
• Of the 30 stocks that make up the Dow industrials, only Wal-Mart rose.
• Five stocks fell for every one that rose on the New York Stock Exchange, where consolidated volume came to 7 billion shares, compared with 5.3 billion Monday.
• The Chicago Board Options Exchange’s Volatility Index, known as the market’s fear index, surged 12.1 percent, its biggest jump since Aug. 17. The VIX stands at 29.2 and is down 27 percent in 2009, and its historical average is 18 to 20. It hit a record 89.5 last October.
