The stock market fell sharply Tuesday after a surprising drop in consumer confidence reminded investors of the fragility of the economic recovery.
The Dow Jones industrials fell 100 points. Interest rates also fell in the bond market as investors moved money out of stocks and into the safety of Treasurys.
The Conference Board said its consumer confidence index fell to 46 in February from 56.5 last month. That was well below the forecast of economists polled by Thomson Reuters. They expected a reading of 55.
Not only did the index fall sharply, it is far from indicating strength in the economy. A reading above 90 means the economy is on solid footing. Consumers are vital to a strong, sustained economic recovery because their spending accounts for more than two-thirds of all economic activity.
The confidence numbers came as investors were already rethinking the more optimistic assessment they had of the economy last week. Stocks had rallied for four straight days on upbeat earnings news, including some from retailers, and on improving housing and manufacturing numbers.
That rally has ended this week in response to a growing pile of disappointing consumer news, including retail earnings reports. While Home Depot Inc., Sears Holdings Corp., Macy's Inc. and Target Corp. all reported better-than-expected earnings Tuesday, the companies indicated that sales growth is lagging. That's a sign that consumers are still too hesitant about the economy and their own job security to spend freely.
"Consumers are still just very confused," said J. Garrett Stevens, CEO of FaithShares, which manages exchange-traded funds. Economic reports remain mixed, which is typical for this point in a recovery and add to uncertainty among investors, he said.
"Until we get more consistently positive trends, it's like to be choppy like this," Stevens said.
The Dow fell 100.97, or 1 percent, to 10,292.41 after being up around 19 before the consumer confidence index was released. The Standard & Poor's 500 index dropped 13.41, or 1.2 percent, to 1,094.60, while the Nasdaq composite index fell 28.59, or 1.3 percent, to 2,213.44.
About two stocks fell for every one that rose on the New York Stock Exchange, where consolidated volume came to 4.54 billion shares, up from 3.84 billion on Monday.
Stocks have been volatile during the first two months of the year, alternating between multi-week stretches of gains and losses. Stocks rallied the past two weeks on signs of domestic growth after a nearly monthlong drop because of worries that European debt problems would upend a global economic recovery.
The Chicago Board Options Exchange's Volatility Index, which is known as the market's fear gauge, shot up 7.2 percent Tuesday. An increase in the VIX signals that investors are prepared for swings in the market.
Meanwhile, interest rates fell in the bond market as Treasury prices rose. Investors were betting that a weak recovery will force the Federal Reserve to keep interest rates low. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.69 percent from 3.80 percent late Monday.
Investors will get further insight into potential interest rate changes when Fed chairman Ben Bernanke testifies before Congress on Wednesday and Thursday.
A modest increase in sales and cost-cutting helped Home Depot's profit top expectations. The home improvement retailer also raised its dividend and outlook, evidence it is confident about the strength of an eventual recovery. Competitor Lowe's Corp. on Monday also raised its outlook, but had a cautious tone about growth.
Like Home Depot, Sears Holdings said falling expenses and a slight boost in sales helped its profit surpass forecasts. Macy's and Target also reported upbeat quarterly earnings.
A report on home prices showed that the housing market continues its slow recovery. The Standard & Poor's/Case-Shiller 20-city home price index rose 0.3 percent from November to December.
Home prices' rate of decline from a year earlier also improved. That measure fell 3.1 percent. Economists had forecast a year-over-year drop of 3.2 percent, compared with a decline of 5.3 percent in November.
"Case-Shiller shows some of this continuing bottoming effect in housing prices," said Michael Strauss, chief economist at Commonfund. "It shows the weakest link in the economy is no longer a drag on the economy."
Overseas markets mostly fell after disappointing economic reports from Germany showed that Europe's largest economy has been hurt by the mounting debt problems in countries like Greece.
Germany's DAX index fell 1.5 percent and France's CAC-40 dropped 1.3 percent. Britain's FTSE 100 fell 0.7 percent. Japan's Nikkei stock average fell 0.5 percent.
The dollar was mixed against other major currencies. It rose against the euro and fell against the British pound. Gold and oil both fell, joining other commodities as investors shied away from investments seen as risky.
The Russell 2000 index of smaller companies fell 7.18, or 1.1 percent, to 625.07.