Stocks close lower on China fears; Caterpillar shares drop 6%

Stocks fell on Wednesday, as investors took a breather after the S&P 500 hit a high for the fourth-straight session, amid worries over financial conditions in China and on the heels of a mixed bag of earnings reports.

The Dow Jones Industrial Average finished 54 points in the red, dragged sharply lower by Caterpillar, which posted disappointing earnings.

The S&P 500 and the Nasdaq also dropped. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose above 13.

The S&P 500 had set a record high for the fourth-straight session Tuesday, closing above 1,750 for the first time, after the tepid September jobs report gave further evidence to investors that the Federal Reserve will continue to support the economy at the current pace. Meanwhile, the Dow is within 1.5 percent of its all-time record set last month.

Most S&P sectors were in the red, dragged by energy and materials. Defensive sectors such as utilities and consumer staples kept a limit on losses.

"Thanks to some overly enthusiastic economic projections that look more and more out of line with reality and a dysfunctional Congress that caused a very partial short-term government shutdown, the Federal Reserve appears likely to allow the current pace of quantitative easing to continue unabated," wrote Scott Wren, senior equity strategist at Wells Fargo Advisors. 

"When we add it up, the tapering phase of QE is unlikely to start until the first few months of 2014 at the earliest."

Caterpillar stock tumbled 6 percent after the heavy equipment maker missed earnings expectations and slashed its full-year revenue forecast. CEO Doug Olberhelman called this year "difficult," especially in Caterpillar's mining-related business.

Meanwhile, fellow Dow component Boeing rallied after the jet maker posted quarterly results that easily topped expectations and raised its full-year outlook. The company also lifted its production scheduled for the Dreamliner to 12 units per month from 10 by 2016.

So far, 160 S&P 500 companies have reported results so far, with nearly 66 percent topping earnings expectations, and 54 percent beating revenue estimates. If all remaining companies report earnings in line with estimates, earnings will be up 2.6 percent from last year's third quarter.

In Asia, Japan's Nikkei and the Shanghai Composite hit one-week and two-week lows amid reports that top Chinese lenders including the Industrial andCommercialBank of China wrote off about $3.7 billion in bad debt for the first six months of the year, higher than last year. Plus, a spike in short-term Chinese money rates weighed on sentiment, after the central bank refused to inject cash into markets for a second straight session.

"The Asian trading session today has seen some pick-up in volatility with equity markets across the region lower…Real GDP growth appears to be improving in China but confidence is likely to remain fragile given these lingering concerns over the degree of bad loans in the banking sector," wrote Bank of Tokyo-Mitsubishi's Derek Halpenny in a research note.

The selloff in Asian markets followed a worldwide boost to risk-on assets on Tuesday, after weak employment data in the U.S. raised hopes the Federal Reserve will not start tapering off its asset purchases until next year.

And adding pressure to the market, the European Central Bank announced it would begin a stress test for about 130 banks in November to see whether they are strong enough to withstand another financial crisis. European shares closed lower.

On the economic front, U.S. import prices gained 0.2 percent in September, but there was no indication of a rise in imported inflation pressures, according to the Labor Department. In the 12 months through September, import prices declined 1.0 percent.

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