Investors Pull Back as Markets Lose Steam After Hard-Charging Summer

NEW YORK, Sept. 1 -- U.S. stocks fell sharply Tuesday despite a pair of better-than-expected economic reports as investors grew increasingly concerned that the breathtaking market recovery during the spring and summer months would not carry into September.

Shares of financial companies, which had propelled the rally, led markets lower on Tuesday, with all-too-familiar fears resurfacing that banks would post more losses. American International Group plunged 21 percent after analysts at Sanford C. Bernstein downgraded the troubled insurer to "underperform" from "market perform."

The broad sell-off came a day after the Chinese stock market dove 6.7 percent. Investors remain concerned about the strength of the Chinese economy, which other countries are counting on to help drive the global recovery. Although the Shanghai composite index posted a slight gain on Tuesday, rising 0.6 percent, the U.S. stock market is taking on a solemn mood heading into September, historically the worst performing month of the year.

Since 1929, the Standard & Poor's 500-stock index has lost an average of 1.3 percent compared with an average monthly gain of 0.5 percent, according to Standard & Poor's. Mark Arbeter, S&P's chief technical strategist, said he thinks the S&P 500 could drop as low as 940 before resuming its advance, according to a research note to clients Monday.

On Tuesday, the S&P 500 fell 22.58, or 2.2 percent, to close at 998.04. It was the first time since Aug. 19 that the index dipped below the 1,000-point mark. The Dow Jones industrial average of 30 blue-chip stocks closed down 185.68 points, or 2 percent, at 9310.60, the third day of losses and the biggest one-day drop in more than two weeks. The tech-heavy Nasdaq also fell 2 percent, to 1968.89.

The markets have rallied from their lowest point in nearly a decade early this year. On March 9, the S&P 500 hit 677, off 57 percent from its October 2007 high. As of Tuesday, the index has recovered 48 percent.

"I think we got ahead of ourselves," said Stanley Nabi, vice chairman of Silvercrest Asset Management. "We still have some of the same problems. I've been optimistic since the bottom of the market . . . but did I think the market would go up 55, 56 percent? No. What I thought is from year-end '08 to year-end '09, the market would be up somewhere around 10 percent. We're there already."

News that the U.S. manufacturing industry grew for the first time in August since January 2008 initially buoyed investors, but were quickly overshadowed by worries that economic conditions, although improving, do not support higher share prices.

The Institute for Supply Management said its index of manufacturing activity rose to 52.9 from 48.9 in July. A reading above 50 -- which indicates growth -- had not been registered in 18 months.

Also Tuesday, the National Association of Realtors, a trade group, reported that pending home sales rose 3.2 percent in July to the highest point in nearly two years.

-- Tomoeh Murakami Tse