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U.S. stocks suffer second worst day of 2012

NEW YORK (MarketWatch) -- U.S. stocks on Thursday took their second hardest knock so far this year as economic reports indicating a slowdown in global manufacturing increased investor anxiety.

Data illustrating a slowdown in euro-area manufacturing and Chinese output also contracting pummeled commodities, with oil falling below $80 a barrel gold prices below $1,600 an ounce.

"We are seeing general weakness, not just here, but around the world. It's going to be very difficult for us to be an island of prosperity while the global economy is slowing," said Paul Nolte, managing director at Dearborn Partners in Chicago.

The Dow Jones Industrial Average (DJIA) retreated 250.82 points, or 2%, to 12,573.57.

The S&P 500 Index (SPX) fell 30.18 points, or 2.2%, to 1,325.51, with energy shares the heaviest drag and utilities the strongest performer among its 10 industry sectors. Goldman Sachs advised clients to short the S&P 500 on Thursday. Read more in financial stocks.

The Nasdaq Composite (COMP) fell 71.36 points, or 2.4%, to 2,859.09.

For every stock rising four fell on the New York Stock Exchange, where not quite 866 million shares traded. Composite volume topped 4 billion.

"The market has been behaving oddly all week," said David Kelly, chief market strategist at J.P. Morgan Funds, who notes that equities failed to bounce on Monday after Greek elections yielded hoped-for results, and that the market seemingly did not like Wednesday's move by the Fed, even though the central bank did as expected.

"The lack of individual interest may be part of it," added Kelly of the low trading volume, which tends to heighten market volatility.

The dollar (DXY) climbed against other global currencies, including the euro (EURUSD) and Treasury prices rose, with the yield on the benchmark 10-year note (10_YEAR) falling to 1.615.

Oil futures (CLQ2) fell $3.25, or 4%, to $78.20 a barrel and gold futures (GCQ2) fell $50.30 to close at $1,565.50 an ounce.

Part of the reason behind crude's drop "is the slowdown in Asia, with the Chinese economy and Indian economy slowing it's taking pressure off oil. It it were due to U.S. weakness it would be kind of a wash, but if it's somebody else's weakness, it's good for the U.S. economy in that it should help consumer spending in the second quarter," said Kelly.

Already down, equities fell harder as Spanish officials released the results of an audit of the country's banking sector. The stress tests of Spanish banks carried out by two independent auditors showed aggregate capital needs for financial institutions in an adverse scenario of between 51.8 billion euros and €62 billion ($65.7 billion and $78.7 billion). Read more on Spanish bank audit.

Separately, the Spanish government succeeded in selling €2.2 billion of various maturities, exceeding the high end of its target range of €1 billion to €2 billion. Read more in Europe Markets.

Kelly also played down the significance of Spanish bank audits.

"The issues in Europe are not and have never been can you save Spanish banks, but can European leaders get together to restart their economy, and I don't think that question is being addressed today."

Claims "haven't spiked above 400,000, which is encouraging, but we're in the muggy, sluggish zone that maintains the status quo," Brad Sorensen, director of market and sector analysis at the Schwab Center for Financial Research, said of first-time claims for jobless benefits, which fell by 2,000 last week, to 387,000, illustrating a lackluster U.S. labor market. See story on U.S. jobless claims edging lower.

A gauge of manufacturing in the Philadelphia region fell in June.Read more on manufacturing.

And, sales of previously owned homes declined in May. See story on home sales.

Also Thursday, the Conference Board's index of leading economic indictors rose 0.3% in May, with the better-than-expected jump offering at least one bright spot in the day's economic reports.Data shows low risk of downturn this year.

"Economic growth is not where we'd like to see it, but it is important to remember there is economic growth. We're still expanding," said Sorensen.

"To me the most important thing is the U.S. economy is not very vulnerable to recession right now, regardless of what the Fed does or doesn't do, and earnings should be reasonably okay," Kelly said.