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Lingering concerns over the health of the financial sector kept investors out of stocks. Earlier in the day, Fitch Ratings placed Merrill Lynch's (MER | Quote | Chart | News | PowerRating) long term rating on negative watch, while Fannie Mae (FNM | Quote | Chart | News | PowerRating) and Freddie Mac (FRE | Quote | Chart | News | PowerRating) extended their losses from Monday on continuing fears that the companies will be forced to raise new capital to compensate for losses from the housing slump.
Likewise, Cisco (CSCO | Quote | Chart | News | PowerRating) contributed to the pressure seen in the tech-heavy Nasdaq. Cisco's shares dropped 5.8 percent after analysts at UBS and RBC Capital Markets raised questions about the company's outlook for the fourth quarter. Cisco's CEO recently said that technology spending would recover later than it originally though.
The negative sentiment among the financials offset earlier buying interest generated from Alcoa (AA | Quote | Chart | News | PowerRating). The aluminum producer reported better than expected earnings in its second quarter, kicking off the traditional start of earnings season. Nonetheless, with financial companies set to report their earnings in the coming weeks, investors were hesitant to move back into stocks.
Meanwhile, oil prices saw a mild rebound early on after falling sharply in the past two sessions amid unrest within the Middle East. Iran's paramilitary Revolutionary Guards test-fired nine long- and medium-range missiles during military exercises that are claimed to be capable of striking targets at a range of 2,000 kilometers, which could penetrate Israel.
The unrest within the Middle East sent oil prices higher earlier in the day, although they ended the day with only a penny gain.
The major averages saw additional selling pressure in the final 30 minutes of the trading day to close near their session lows. The Dow closed down 236.77 points or 2.1 percent at 11,147.44, the Nasdaq closed down 59.55 points or 2.6 percent at 2,234.89 and the S&P 500 closed down 29.02 points or 2.3 percent at 1,244.68.
Stock markets across the Asia-Pacific region closed mostly higher Wednesday after Wall Street rallied overnight. However, the markets pared some of the gains on news that Iran has test-fired missiles. The Japanese market closed slightly higher, giving away most of the early gains, as selling emerged in the afternoon session.
The major European markets showed considerable strength as well. The French CAC 40 Index and the German DAX Index closed up 1.5 percent and 1.3 percent respectively, while the U.K.'s FTSE 100 Index ended the day 1.6 percent higher.
Meanwhile treasuries ended the day higher, as investors looked for safety in government backed bonds. The benchmark ten-year note fluctuated during the morning, but then moved decidedly higher in afternoon trading, to close just off of its best level of the day. Subsequently, the yield on the ten-year note closed down 4.6 basis points at 3.834 percent, setting a six week closing low.
Looking ahead to Thursday, the Federal Reserve will once again be in the spotlight when Fed Chairman Ben Bernanke, along with Treasury Secretary Henry Paulson, testifies to the House Financial Service Committee on financial market regulatory.
Later in the day, San Francisco Federal Reserve Bank President Janet Yellen will speak in Portland Oregon.
In other economic news, the Labor Department will release its weekly report on initial jobless claims. Economists expect jobless claims to edge down to 399,000 in the week ended July 5th from 404,000 in the prior week.
The retail sector may come into focus on Thursday as well, as individual retailers report their monthly sales numbers. With investors worried that rising energy costs will force investors to pare back discretionary spending, the chain store sales data may give a clue how the economy is faring.
Real estate stocks turned in some of the worst declines on Wednesday, as they gave back the gains posted in the previous session. The Morgan Stanley REIT Index closed down 7 percent, setting a five month closing low.
Within the real estate sector, Hersha Hospitality (HT | Quote | Chart | News | PowerRating) and Ashford Hospitality (AHT | Quote | Chart | News | PowerRating) were two of the biggest losers. Hersha closed down 15.2 percent, compared to a 10.9 percent decline in Ashfor Hospitality.
The financial sector also saw significant selling pressure, hurt by the sharp declines from Freddie Mac and Fannie Mae as well as Merrill Lynch. The S&P Bank Index fell 6.7 percent, while the Amex Securities Broker/Dealer Index closed down 6.2 percent.
Freddie Mac and Fannie Mae plummeted on continued concerns over the health of the companies. Freddie Mac closed down 23.8 percent, compared to a 13.1 percent decline from Fannie Mae.
Airline stocks showed considerable weakness as well, despite the price of oil ending the day with a modest decline. The Amex Airline Index is down 5.9 percent, although it closed well off of its record closing low set on Monday.
Other stocks that closed notably lower include housing, semiconductor and retail stocks. The Philadelphia Housing Index closed down 5 percent, the Philadelphia Semiconductor Index closed down 4.3 percent and the S&P Retail Index closed down 3.3 percent.
On the other hand, the steel sector saw a moderate gain, led higher by Cleveland-Cliffs (CLF | Quote | Chart | News | PowerRating). Shares of Cleveland-Cliffs closed up 15.1 percent after the company raised its outlook for 2008 due to higher steel prices. The Amex Steel Index closed up 1 percent.
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